The Dow's 5 Most Hated Stocks

Since the Dow Jones Industrial Average (DJINDICES: ^DJI  ) hit an all-time record high on Friday on the heels of a better-than-expected jobs report, there's no shortage of optimists. With the symbol of American business strength putting the lost decade in the rearview mirror, low lending rates and an improving jobs environment are encouraging businesses and consumers to slowly become more liberal with their spending habits.

However, not everyone agrees that the market is in better shape than when the Dow last hit all-time highs in 2007. In fact, some data -- especially second-quarter enterprise revenue data -- would suggest that cost-cutting, rather than top-line growth, is fueling this rally. For those skeptics, I give you the Dow's five most hated stocks. These are the five companies that carry the highest short interest within the Dow Jones index.

As I did last month, I will examine why these companies draw the short-sellers and determine whether or not that short interest is warranted.

Company

Short Interest as a % of Shares Outstanding

Alcoa (NYSE: AA  )

8.29%

Intel (NASDAQ: INTC  )

4.74%

DuPont (NYSE: DD  )

3.34%

Johnson & Johnson (NYSE: JNJ  )

3.2%

Hewlett-Packard

2.85%

Source: S&P Capital IQ.

Alcoa
Why are investors shorting Alcoa?

  • Alcoa finds itself with significantly more short interest than it had last month as short-sellers continue to bet against a sustained rebound in aluminum prices and demand. Alcoa has resorted to idling capacity in order to reduce expenses, but it nevertheless stuck to its guns in its first-quarter results by topping EPS expectations and continuing to forecast 7% global aluminum demand growth this year.

Is this short interest warranted?

  • This one is tough to call. Between Alcoa's idle capacity and the fact that China's economy is growing at a much slower pace than in the previous 30 years, there are certainly ample reasons for investors to remain cautious. However, the outlook for aluminum demand over the long run appears healthy, and the company could turn out to be quite a bargain if other emerging-market regions like Eastern Europe or South America see a big pick-up in demand.

Intel
Why are investors shorting Intel?

  • Although it's a cyclical company that can deal with the natural ebb and flow of the technology cycle, nearly all of Intel's pessimism surrounds the continued weakness in PC sales. During the first quarter, according to research firm IDC, PC sales fell 14%, which means Intel needs to invest heavily in research and development in order to rapidly improve and introduce its mobile and cloud chip offerings if it wants to stay ahead of the curve.

Is this short interest warranted?

  • I'd say yes and no. Over the short run, Intel will struggle with lower margins as higher expenses from R&D eat into its bottom line and PC sales continue to weaken. Then again, Intel is positioning itself to be a leader in cloud-based server hardware and is gearing up to derive 30% of its revenue from its cloud-based hardware segment within the next decade. The company's ability to generate significant cash flow would be enough to deter me as a short-seller.

DuPont
Why are investors shorting DuPont?

  • Despite a small drop in short interest, DuPont is still attracting its fair share of pessimists who feel that the company's chemical business is too intricately tied to a fragile European and U.S. economy. The company's first-quarter report delivered a better-than-doubling in net income, but that was boosted by the $1.9 billion sale of its performance-coating unit. Strip that out, and volume rose by just 2% as Europe dragged on overall performance.

Is this short interest warranted?

  • I swear I'm not being willfully ambiguous, but "definitely maybe" is yet again the answer. In the near term, DuPont will struggle to boost its bottom line as Europe remains weak and China's GDP growth runs below the norm. Over the long run, though, a rebound in China and Europe and the increasing need for food will help boost DuPont's chemicals and agricultural segments. The "X factor" is whether or not the continued rebound in the U.S. housing market can provide a more immediate boon to DuPont's share price.

Johnson & Johnson
Why are investors shorting Johnson & Johnson?

  • A bet against Johnson & Johnson is primarily a bet that the struggles in Europe will continue and that J&J's growth rate won't be sufficient to justify its forward P/E of 15. J&J's first-quarter report, however, would suggest otherwise: Domestic sales rose 11.2%, international sales ticked up 6.3% despite a negative 2.4% currency headwind, and adjusted EPS added 5% over the year-ago period.

Is this short interest warranted?

  • Of all the most shorted Dow components, this is the biggest head-scratcher by far. J&J purchased Synthes last year for $19.7 billion to expand its medical-device presence in rapidly growing markets (taking care of international growth). Earlier this year, it received approval from the Food and Drug Administration for a revolutionary new class of type 2 diabetes drug, Invokana (hello, organic growth!). Seriously? Investors want to bet against this? Dream on! 

Hewlett-Packard
Why are investors shorting Hewlett-Packard?

  • On the flip side, HP has given short-sellers a laundry list of reasons to dislike the company. Among others, its most recent quarterly report showed revenue declines in all five major segments, it recently shed 27,000 jobs, and an IDC report last week showed an 18.9% drop in HP server shipments in North America in the first quarter compared to a 9.9% gain for struggling Dell.

Is this short interest warranted?

  • Everyone loves a turnaround story, but HP is a long way from having its plan fully implemented. CEO Meg Whitman is certainly an amazing cost-cutter, but I have yet to see what innovations HP will bring to the table to help differentiate its hardware from everyone else's. Sure, HP is cheap on a forward-earnings basis, but it could get considerably more expensive if all of its business segments keep going in reverse. Here's a stock the short-sellers have a firm grasp of.

Do these five Dow components deserve this pessimism? Share your thoughts in the comments section below.

Is it time to put your pedal to the metal?
Materials industries are traditionally known for their high barriers to entry, and the aluminum industry is no exception. Controlling about 15% of global production in this highly consolidated industry, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospect and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant, simply click here now to get started.


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  • Report this Comment On May 07, 2013, at 8:15 AM, funfundvierzig wrote:

    DuPont has been struggling and shrinking for the duration of the 21st century to date. Beset by an inbred mediocre Management with few ideas other than cost-slashing and killing jobs, read that careers, selling off businesses and product lines, DuPont proves the case you can't cut your way to growth and prosperity. Nor can you disguise your diminution and degradation indefinitely with slick public relations campaigns and "Sustainability" stunts. ...funfun..

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