The Dow's 5 Most Hated Stocks

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) may have had a slight swoon over the past two weeks, but make no mistake about it -- the economy is slowly finding its footing thanks to a shrinking unemployment rate, accommodative monetary policy by the Federal Reserve, and a strengthening housing sector.

However, not everyone is drinking from the same punchbowl. Plenty of pessimists still exist who project that the end of QE3 will prove disastrous for the economy and some of the nation's largest companies. Today, I propose to examine the five most short-sold stocks in the Dow -- the so-called five most hated Dow stocks -- as we've done in prior months, find out what makes them so disliked by short-sellers, and determine whether this pessimism is warranted.

Company

Short Interest As a % of Shares Outstanding

Alcoa (NYSE: AA  )

8.51%

Intel (NASDAQ: INTC  )

4.53%

Caterpillar (NYSE: CAT  )

3.96%

Hewlett-Packard (NYSE: HPQ  )

2.99%

DuPont

2.89%

Source: S&P Capital IQ.

Alcoa
Why are investors shorting Alcoa?

  • The story hasn't changed much on Alcoa over the past couple of quarter, even though short interest in the company rose slightly from last month. Alcoa's aluminum pricing and demand are both under pressure because of weaker-than-expected growth in China, lower demand in Europe, and oversupply in many other parts of the globe. Alcoa has stymied some of its higher costs through idling some of its production, but that also defeats many chances it has of growing its top line in the interim.

Is this short interest warranted?

  • Short-sellers certainly have all the reasons they need to expect nothing better than mediocrity out of Alcoa, but I think the upside potential far outweighs what nominal downside might be left. Alcoa stuck to its forecast of 7% global production growth in 2013 and should see a revival in demand when South American and East Asian emerging markets begin their next round of infrastructure upgrades. While I'm not ready to pull the trigger just yet in my own portfolio, I do have Alcoa firmly on my own personal Watchlist.

Intel
Why are investors shorting Intel?

  • The knock against Intel lies squarely with its reliance on the PC market. Despite controlling 85% of the microprocessor market in laptops and desktops, this market is rapidly ceding sales to tablets and smartphones, which Intel is late to penetrate. Intel has realigned its focus to ensure it's developing the hardware to lead the next generation of smartphones and tablets, as well as angling itself to be a prime developer of cloud-based hardware. However, the extra R&D needed to enact this new strategy could stymie Intel's profits over the interim.

Is this short interest warranted?

  • I fully understand why short-sellers are skeptical of Intel, but I don't believe they're seeing the big picture. Intel's decline in PC's will be slow and gradual, and it remains a source of consistent cash flow in the meantime. In addition, Intel is in line to be the prime beneficiary of the big data center evolution, with its next-generation processing chips being used by big name storage companies. Intel has also begun to edge its way into the tablet microprocessing market with a lion's share of the Windows OS tablets and just last week with the announcement that its microprocessors were found in the Samsung Galaxy Note 3.

Caterpillar
Why are investors shorting Caterpillar?

  • If you want one reason to blame for Caterpillar's emergence on the Dow's most-hated stock list, then look no further than weaker metal and coal prices. Caterpillar is a manufacturer of heavy-duty construction and mining equipment, among other things. If mineral miners are putting off projects and reducing capital expenditures because gold, silver, and other mineral prices are down, then it will adversely affect Caterpillar's bottom line and eventually its backlog. Not surprisingly, Caterpillar's first-quarter results missed the mark, and the company lowered its full-year EPS guidance. 


Source: Martin Pettitt, commons.wikimedia.org. 

Is this short interest warranted?

  • Like Alcoa, the reasons to be pessimistic are certainly there, and the fact is that Caterpillar's fortunes are unlikely to turn around at the drop of a hat. However, as a metal bull myself, I don't foresee Caterpillar running into too much additional downside as long as precious-metal prices don't nosedive from their current levels. Keep in mind, as well, that demand for precious metals, as well as the need for agricultural equipment, should ultimately boost Caterpillar's orders. I'd suggest exercising some caution here if you have short-term intentions. Otherwise, Caterpillar appears ready to haul your portfolio to gains over the long run.

Hewlett-Packard
Why are investors shorting HP?

  • If Intel is an indirect sufferer of the decline of the PC market, then HP is the front line of the walking wounded. In HP's most recent quarter, the PC maker pointed to a whopping 20% decline in PC revenue, with research firm IDC reporting that PC sales industrywide dropped 14% during the first quarter. The one saving grace has been HP's steep cost-cutting, which will see 29,000 jobs cut before the end of 2014 and also allowed HP to forecast better-than-expected earnings in the second-quarter.

Is this short interest warranted?

  • As much as I like HP's cash flow, I think there are numerous kinks to still be worked out in HP's various business segment. A company doesn't shed 29,000 jobs in a two-year span and move forward as if nothing happened without some hiccups along the way. I've yet to see any concrete plans of how HP plans to grow its top line, and I suspect that the company will have a hard time boosting its EPS beyond this year as it squeezes every last drop out of the cost-cutting turnip. If there was a company worthy of being the Dow's most short-sold stock, I think it should be HP.

DuPont
Why are investors shorting DuPont?

  • Not to sound like a broken record, but once again, blame Europe! DuPont, which relies on its chemicals and agricultural business to drive growth, has seen demand stagnate in Europe because of tight government spending while not seeing the same follow-through from the U.S. and China that it has in the past, with both growing below their historical averages.

Is this short interest warranted?

  • Unfortunately for DuPont shareholders, a lot depends on whether Europe's economy improves -- at least over the short term. Over the long run, DuPont's agricultural segment looks poised to prosper as the amount of food needed to feed a growing global population is rising and farmers need better yield from their crops. So yet again, we have a company, like Alcoa and Caterpillar, that could struggle for a few more quarters but appears to have more long-term upside than downside potential.

Which of the Dow's most hated companies do you think has the best chance of heading higher? Share your thoughts in the comments section below.

Has this lion been caged at last?
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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2013, at 7:27 PM, funfundvierzig wrote:

    The much shrunken and shrinking DuPont Company has been on a downward glide-path for 15 years, with its market cap cratering from a peak of $110 billion to $50 billion today.

    "Blame Europe"??

    No, blame DuPont "leaders". This once powerful, number one world leader in chemicals and related materials has been crushed by an entrenched and inept Senior Management, misfiring, mismanaging, and misleading.

    ...funfun..

  • Report this Comment On June 08, 2013, at 7:51 PM, funfundvierzig wrote:

    DuPont's PR-driven executives hawk their DuPont AG & NUT businesses as their "crown jewel". But the stark commercial reality is DuPont is second-place and second rate in...

    * Ag chemicals to world-leader Syngenta,

    * Seeds to Monsanto,

    * Industrial enzymes and additives to Novozymes, S. A., and

    * Lawn and garden products to Scotts Miracle-Gro. Imprelis, Tell Us!

    Periodically shorting this stock when it fluctuates to the upside has made sense for the entire 21st century. ...funfun..

  • Report this Comment On June 09, 2013, at 12:17 AM, BigMont wrote:

    Intel will, in the long run, generate the highest return of the 5 stocks listed. Too many outstanding attributes - balance sheet, market dominance in pc processors, outstanding R&D that will eventually lead to dominance in mobile, high commitment to shareholders. Indeed, I'm thinking of adding to my already substantial Intel holdings.

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