After Wal-Mart (WMT) announced its outstanding June numbers, Wall St. said the company was actually “recession proof”. Consumers, beat down by high gas and commodities prices, could turn to Wal-Mart to get relatively high quality goods and groceries at low prices. That would give its same-store sales a boost that might last throughout a recession. The power of the opinion lasted one month. Wal-Mart’s same-store sales were weak in July.
Investors have begun to turn to Wal-Mart as a safe haven. The company has a strong balance sheet, good cash flow, and a modest 1.7% yield. The shares were supposed to hold up as the stock market went down. The stock was almost $61 before Wal-Mart posted its July numbers. Then, it collapsed straight down to under $57.
Wal-Mart joins a list of large-cap stocks which were supposed to be good investments as the economy slowed. Most of the corporations on that list have proven that they don’t belong. For some of them, it only took one quarter’s results.
GE (GE) had been high on the list for almost a year going into 2008. Its shares made it to $42 last October. The case in favor of the company was that its businesses were diversified and that it does a lot of business overseas in fast-growing economies. Even with its stock way up, it had a yield of over 2%. Then GE posted its Q1 and Q2 earnings. Two things were clear. The first was that GE had some divisions which were doing badly in a tough economy. Medical equipment and industrial products were at the top of that list. And, the slowdown in the US was not limited to the US. GE earnings showed that there was some softness overseas.
Apple (AAPL) was a “fail safe” stock. Sales growth of its iPod continued to move up well as the year passed. The market was pleasantly surprised that sales of the Mac grew faster than the PC market as a whole. The iPhone was considered a sure-fire product. Initial sales of the handset hit a million units in the first three days it was on the market. Before announcing its most recent quarter and its forecast for the rest of the year, the stock nearly hit $190. But, Apple’s projections for the rest of the year were below what Wall St. expected. Its shares dropped to just above $153 and have not recovered much since.
Exxon Mobil (XOM) should have been another big winner. The world’s largest oil company posted a massive $11 billion profit for the last quarter. With oil well above $120, an economic slowdown would not matter to the company. But, oil prices have started to move south and investors began to focus on the part of Exxon which is doing very poorly. Its refinery operations are losing their margins. As the price of oil rises, Exxon cannot quickly pass those increases onto retailers of oil and gas and manufacturers of oil by-products. Exxon was a $95 stock in May. Now it trades below $78.
Google (GOOG) was another lock as a stock that would do well through a recession. It owns so much of the search market that advertisers should not have been able to stop using it to generate leads, even in a slow business environment. Early in the year,the market was concerned that even Google might get bitten a tiny amount by a poor advertising environment. When it turned in its Q1 results that did not turn out to be true. Google jumped from $450 to almost $600 in just a few weeks. Wall St. looked at those numbers and saw a good year for Google. That was until its Q2 figures came out. The recession had hit Google with some force. Its shares immediately sold off to just above $460.
AT&T(T) has a cellular unit which has been growing so fast that it has jet propelled the company’s earnings for the last three years. Since cell phone use is almost universal, even in a poor economy it is a business which should hold its own. AT&T has also been making inroads with cable company customers. Its fiber TV and broadband product are supposed to offer higher connection speeds than cable does. That means it can market more high definition channels and faster broadband. All of those good expectations moved AT&T shares up to almost $41 in May. But, then the company put out its most recent numbers. They showed that the company’s huge landline business was being plagued by customer losses as the economy slowed and some people decided to keep only one phone line—their cell. The quarterly report also indicated that cable companies were taking away landline customers with VoIP. All of that bad news pushed AT&T down to $30.
Each of these companies will be around for decades, but many of them have underperformed the Dow in the last quarter. They are hardly “safe” for investors who want to preserve capital in a bad market. If these firms can’t post promising results, not many companies can.
Douglas A. McIntyre
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