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CAPS All Stars and Their 3 Least Favorite Dow Stocks

One of the most effective methods I use to find new companies for my watchlists is to simply see what the best of the best on Motley Fool's CAPS are picking.  Providing me with a rating of one to five stars, I am quickly able to find many stocks that are loved on CAPS -- and similarly, many that aren't.  By doing this, I am able to get a general feeling on stocks I like and stocks I might want to avoid for a long term investments. Today we will take a look at the CAPS All Stars, or the top 20% of investors on the stock picking network, and see what their 3 least favorite stocks are in the Dow Jones Industrial Average.  

Bull to bear ratio
By simply dividing the All-Stars bullish selections by their bearish picks, I am easily able to determine the least-loved stocks in the Dow.

Stocks Home Depot Microsoftt JP Morgan Goldman Sachs
Bull/Bear Ratio 8.2 10.5 11.5 11.7

Just barely beating out one of the three newcomers to the Dow, Goldman Sachs, I am left with JPMorgan Chase & Co. (NYSE: JPM  ) , Microsoft Corp. (NASDAQ: MSFT  ) , and somewhat surprisingly, Home Depot  (NYSE: HD  ) .  With the top three settled, I can now dive in and see why these companies are frowned upon by the All Stars.

A huge bet on the housing recovery
Batting first we have the least-loved stock in the Dow Jones Index, home improvement and do-it-yourself retailer Home Depot. When I first completed my basic math on the 30 stocks in the Dow, I was shocked to see the distaste toward the company. This could be due to Home Depot's stock rising almost 150% in just the past 3 years, but my surprise also had to do with the fact that the company has a major tailwind at its back with an ongoing housing recovery. Perhaps there are a handful of selections riding out an unsuccessful underperform call from the 2007-2008 housing collapse, but it seems like the hate towards Home Depot isn't justified.  

With private fixed residential investment as a share of GDP at only 2.7% in the first quarter of 2013 -- versus its historical average of 4.5% -- it is clear to see that the company has a huge catalyst for growth ahead. Furthermore, as Joseph Solitro pointed out, Home Depot has been extremely generous to its shareholders. Lowering its share count from 2.3 billion in 2004 to 1.5 billion now, the company has seen its earnings per share nearly double during the same time period. Planning $6 billion more in buybacks in 2013 and raising its 2% dividend yield again in 2013, Home Depot has shown investors the benefits of investing in a cash flow machine.

Abundant buybacks
Coming in as the second most hated Dow stock, and quite understandably at times, we have Microsoft. On the hunt for a new CEO and repeatedly lighting excess cash on fire with unsuccessful acquisitions, Microsoft has quickly become a battleground for value investors. To make matters worse, rumors are floating around that Bill Gates is being asked to step down, just a month after the company spent $7.2 billion on Nokia's failing phone business. However, all is not yet lost for Microsoft shareholders, as Softy still has roughly $70 billion in cash on hand and is set to earn $25 billion in free cash flow for 2013. Pair that up with its recent announcement to buy back $40 billion worth of shares and its decision to raise its dividend to a 3.3% yield, anf we have plenty of excitement for value investors. However, how long can these shareholder returns last with the company's propensity for making bad acquisitions?

The banking behemoth
Last but not least, the third most unloved stock in the Dow is banking behemoth JPMorgan and its $100 billion in yearly revenue. Surviving the recession incredibly well, JPMorgan was the only major bank that didn't realize an operating loss when times got tough. Regardless, the Jamie Dimon-led bank still has a number of factors seemingly working against it. To name a few: the London Whale, a possible $11 billion fine, and a frighteningly large footprint after its Bear Stearns and Washington Mutual acquisitions. While the last point may end up being a benefit down the road, it greatly increased the risk that shareholders were taking on. As Leucadia's founders, Ian M. Cumming and Joseph S. Steinberg, noted in their final Annual Report in 2012, "We have always preferred to make money, rather than headlines," and I feel much the same way when it comes to JPMorgan.

Foolish final thoughts
While all three companies have reasonable catalysts, I believe Home Depot's immediate and long term prospects are the most intriguing. With Microsoft continuously throwing money at bad acquisitions and JPMorgan constantly in the news for all the wrong reasons, I will have to side with the consensus of the All-Stars and stay away from these two. 

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Related Tickers

9/30/2016 4:00 PM
HD $128.68 Up +0.75 +0.59%
Home Depot CAPS Rating: ****
JPM $66.59 Up +0.94 +1.43%
JPMorgan Chase CAPS Rating: ****
MSFT $57.60 Up +0.20 +0.35%
Microsoft CAPS Rating: ****