The Dow's 5 Most Loved Stocks

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) may have seen its seven-month streak of gains come to an end in June, but you certainly wouldn't know it by the resilient bounce large and small-cap stocks have shown since the minor swoon two weeks ago.

Nearly all aspects of the economy have served to push the Dow higher in 2013. The U.S. jobs picture is improving as evidenced by the better-than-expected gain of 195,000 in June compared to forecasts which had been calling for the addition of just 165,000 jobs. The housing market remains stable despite slightly higher mortgage rates thanks to inventory scarcity and rising home prices. Even consumer spending is showing signs of strength with U.S. auto sales in June sliding past estimates.

Some companies in the Dow naturally speak to the skepticism of investors who simply don't trust in this rally. For many other Dow components, though, short-sellers know better than to press their luck. With that in mind, I propose we yet again have a glimpse at the Dow's five most loved stocks (i.e. the five least short-sold) and discover what it is about them that causes short-sellers to tuck their tails between their legs and run away. We'll also take a look at whether or not investors can expect the good times to keep rolling for these five loved Dow components.

Company

Short Interest As a % of Shares Outstanding

United Technologies (NYSE: UTX  )

0.64%

Coca-Cola (NYSE: KO  )

0.64%

Wal-Mart (NYSE: WMT  )

0.71%

Procter & Gamble (NYSE: PG  )

0.72%

General Electric 

0.81%

Source: S&P Capital IQ.

United Technologies
Why are short-sellers avoiding United Technologies?

  • United Technologies delivered the biggest boost this month, rising from fourth-least short-sold stock in May to the head honcho in June on the heels of strong first-quarter growth. Although organic revenue growth dipped 2%, its Otis elevator business saw revenue jump 24% while revenue related to China leapt 29%. Many shareholders have to be thinking that the negative effects of the sequester in the U.S. have been largely overstated following these results which has been a big factor in scaring short-sellers away.

Do investors have a reason to worry?

  • Last month I commented that "investors probably don't have too much to worry about" assuming China's growth remains consistent. Consider that assessment slightly damaged as we head into July. A credit crunch in China threatens to drastically slow down growth in a country that's historically grown at 10% per annum over the past three decades. In addition, a shortage in the metals market due to weak metal prices causing miners to furlough production could cause added problems. For now I wouldn't overreact to these Chinese concerns, but I also wouldn't be surprised to see short interest on United Technologies rise moving forward, either.

Source: Joe Wolf, Flickr.

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

  • Since "because they're smart" isn't explanatory enough, I'd rather let some of Coke's metrics speak for themselves. Coca-Cola is, according to Interbrand, the most value brand-name in the world; it boasts practically half of all non-alcoholic drinks that bring in more than $1 billion in revenue annually; and it operates in all but two countries around the globe. Coca-Cola's business is so strong that in addition to spending close to $3 billion on advertising in 2010, its products practically sell themselves by impression and association alone.

Do investors have a reason to worry?

  • Short-sellers are rarely long-term oriented, so their main purpose is to make a quick buck and get out. The simple fact that Coca-Cola boasts an extremely low beta of 0.33 (which means it is only 33% as volatile as the S&P 500 based on its average daily movements) doesn't exactly make it a short-selling target. The other factor here relates to Coke's consistency. Because its products are spread throughout the globe, it'd take nothing short of a depression or egregious mismanagement to cause an extended and serious slide in Coke's share price. I continue to say that not only does Coke look safe for the long run, but it makes for an intriguing candidate for your IRA.

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

  • Short-sellers certainly have to have some serious gall to bet against Wal-Mart with the world's largest retail chain having enough clout to undercut nearly all other retail chains based on price. Wal-Mart has used its pricing power and its ability to provide everything from groceries to gardening tools to win over the American consumer. As long as consumer spending continues to expand, Wal-Mart shareholders will continue to reap the rewards of the company's incredible cash flow.

Do investors have a reason to worry?

  • Wal-Mart has very little to worry about when it comes to its peers. The big worry for Wal-Mart is how government actions, such as the sequester, IRS furloughs as they relate to income tax refunds, and payroll tax policy, could lead to future consumer spending cuts in its stores. Shareholders experienced a scary scenario earlier this year when Wal-Mart's sales dipped because of delayed tax refunds, so they're well aware that even the great Wal-Mart isn't impervious to a consumer spending shift. For now I'd suggest Wal-Mart shareholders remain on guard and take things a quarterly report at a time.

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

  • The reason to avoid P&G if you're a short-seller is pretty simple to understand if you consider that many of its consumer products remain in demand regardless of whether the economy is booming or in a recession. To that end, this means P&G is able to maintain considerable pricing power in any economic environment. With solid cash flow and the largest advertising budget of any company in the U.S., P&G has been among the Dow's most consistent names since the recession.

Source: Au Kirk, Flickr.

Do investors have a reason to worry?

  • Similar to Coke, P&G has an even lower beta of 0.31 which is more than enough to disincentivize short-sellers looking for a quick buck to stay away! Partly to the benefit of short-sellers, P&G has been spending heavily on building value around its premium core brands, but hasn't had much of a bottom-line effect on sales. This would give credence to short-sellers that some consumers have traded down to non-brand names to save money. However, over the long run I wouldn't be too concerned with P&G's lack of ad-to-sales translation and would suggest short-sellers seriously think twice before betting against P&G.

General Electric
Why are short-sellers avoiding General Electric?

  • GE's biggest advantage is its business diversity which has helped keep short-sellers at bay. GE offers investors everything from a financial arm to turbine engines. You also get impressive geographic diversity with GE with sales coming domestically, as well as from Europe, Asia, and South America. GE could become a prime player in the United States' transformation into an energy efficient nation, which should be giving short-sellers something to think about before they take the plunge.

Do investors have a reason to worry?

  • Being another low-beta company that operates across a number of sectors, short-sellers are going to have a hard time gaining much ground on GE. However, GE did have to lower its full-year profit forecast in April because of order weakness in Europe.  This could give short-sellers the opening they've been waiting for as quarterly weakness is rarely a one-time thing. GE shareholders should remain on guard and could see some short-term weakness in shares, however, I don't think these problems will be too much of a concern over the long run.

Which Dow component do you feel the least confident about? Share your thoughts in the comments section below.

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Related Tickers

9/19/2014 4:36 PM
^DJI $17279.74 Up +13.75 +0.08%
DOW JONES INDUSTRI… CAPS Rating: No stars
KO $42.05 Up +0.26 +0.62%
Coca-Cola CAPS Rating: ****
PG $84.47 Up +0.28 +0.33%
Procter & Gamble CAPS Rating: ****
UTX $108.45 Down -0.07 -0.06%
United Technologie… CAPS Rating: ****
WMT $76.84 Up +0.62 +0.81%
Wal-Mart Stores CAPS Rating: ***

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