The Dow's 5 Most Loved Stocks

If last decade was the "lost decade," then this decade is certainly something of a rebirth for the markets, which have more than doubled off their recession lows. The Dow Jones Industrial Average (DJINDICES: ^DJI  ) , which is made up of a mix of 30 diversified sectors leaders that encompass the health of the overall economy and has symbolized the strength of the American stock market for nearly 200 years, hit an all-time intraday record high above 15,000 on Friday.

Four years ago, none of this would have been even remotely imaginable; however, a series of enterprise cost cuts and favorable monetary policy from the Federal Reserve has the U.S. economic train firmly back on the tracks. Not everyone agrees that the markets can necessarily head higher, but few investors would dare bet against the Dow's five most loved stocks.

As we did last month, I propose examining the five Dow Jones companies with the least amount of short interest, determine why short-sellers are avoiding them, and offer my opinion on whether or not shareholders have anything to worry about.

Company

Short Interest As a % of Shares Outstanding

Coca-Cola (NYSE: KO  )

0.77%

General Electric (NYSE: GE  )

0.80%

Wal-Mart (NYSE: WMT  )

0.84%

Procter & Gamble

0.86%

Pfizer (NYSE: PFE  )

0.88%

Source: S&P Capital IQ.

Coca-Cola
Why are short-sellers avoiding Coca-Cola?

  • Coca-Cola retains its position as the Dow's least short-sold stock for the second month in a row on the simple fact that it's the most valuable brand in the world according to Interbrand. Having such an easily recognizable brand-image, and selling its products in all but two countries around the globe, Coca-Cola has the global diversity that most companies would die to achieve. It also doesn't hurt that Coke has raised its dividend in 51-straight years which tends to detract short-sellers.

Do investors have a reason to worry?

  • If you want to worry about something, make it your favorite sports team or whether your favorite store is going to have its much-anticipated sale, because Coca-Cola is about as safe a stock as they come! In its first-quarter report in April, global volume grew by 4% and net revenue, excluding the impact of unfavorable currency effects, rose 2%. With demonstrable and steady organic growth domestically and in overseas markets, Coke could be the perfect company for conservative investors to place in their individual retirement accounts.

General Electric
Why are short-sellers avoiding GE?

  • Also retaining its position as the second least short-sold stock in the Dow is GE which saw its short interest drop slightly month-over-month. This is understandable, as GE's first-quarter results added fuel to the fire that its rebound will continue. Overall, operating earnings rose 15% as the conglomerate delivered double-digit industrial revenue growth in five of its nine markets. Furthermore, GE Capital, the segment responsible for nearly taking GE down during the recession, reported a 9% increase in profits. 

Do investors have a reason to worry?

  • As with Coke, GE isn't giving short-sellers any reason to latch on. Growth has been regularly coming in ahead of expectations for two-plus years now, and GE's financial arm has been slowly improving its loan portfolio quality and liquidity. Also, plans for GE's energy segment to split into three separate companies are only bound to unlock shareholder value by improving revenue and profit visibility. This isn't a company I'd recommend short-sellers bet against, even if its European business came in weaker than expected in the most recent quarter.

Wal-Mart
Why are short-sellers avoiding Wal-Mart?

  • Retail kingpin Wal-Mart makes its debut as the Dow's third least short-sold company in April primarily because of its retail diversity and unrivaled pricing clout. In February, when it reported its fourth-quarter results, Wal-Mart delivered modest, but steady, 1% comparable-store sales growth in the U.S., with international net sales jumping better than 7%. With the ability to undercut local competition and deliver unparalleled product diversity, few short-sellers will bet against this king of retail.


Source: Commons.wikimedia.org. 

Do investors have a reason to worry?

  • The combination of higher payroll taxes and, more importantly, delayed tax refunds is certainly taking a bite out of Wal-Mart's bottom line to start the year. This alone could have a very short-term negative effect on Wal-Mart's share price and vindicate short-sellers. However, over the long run, Wal-Mart's pricing clout is simply too strong for me to suggest making an extended bet against the company.

Procter & Gamble
Why are short-sellers avoiding Procter & Gamble?

  • Jumping one spot from the previous month is consumer-products maker Procter & Gamble. As I noted last month, consumer products like detergent and toothpaste are going to be purchased regardless of whether the economy is shrinking or growing rapidly, so it gives P&G incredible pricing power across a wide swath of its products. Also, with relatively low volatility, P&G doesn't tend to attract short-sellers looking for a quick buck.

Do investors have a reason to worry?

  • Over the long run, P&G appears to be a safe bet to head higher, although over the next couple of quarters, short-sellers may have some ground to stand on. P&G's first-quarter report released in April failed to impress investors, as the company noted that increased marketing expenses have failed to boost sales of some key products. Higher marketing expenses will surely constrain profits in the interim and could give short-sellers a short but sizable opportunity to make their impact.

Pfizer
Why are short-sellers avoiding Pfizer?

  • Big pharmaceutical companies like Pfizer are rarely atop investors' short list primarily because of their high yields (3.2% in Pfizer's case) and small price fluctuations. Adding to that, Pfizer's been on fire ever since gaining U.S. approval for blood-thinning drug Eliquis, which was co-developed with Bristol-Myers Squibb. Eliquis proved far superior in a head-to-head with Warfarin in nearly every respect and could generate up to $5 billion in peak sales.

Do investors have a reason to worry?

  • I'd say the answer to this question is "definitely maybe." The Eliquis approval was extremely important for Pfizer and Bristol-Myers, as both product portfolios have been under pressure from patent expirations. Then again, over a three-year period (2011-2014), Pfizer is going to lose patent protection on about one-quarter of its revenue stream. While new drug approvals are great, they won't immediately soften the blow of lost revenue from generic competition. With revenue declines expected this year and next, short-sellers could have a field day with Pfizer over the next two years.

Which Dow component listed above would you feel the safest owning? Share your thoughts in the comments section below.

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  • Report this Comment On May 06, 2013, at 11:51 AM, FelixCaliferous wrote:

    A low short interest is not exactly 'love.' It could also be the results of low volatility or high dividend yield.

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