The Dow's 5 Most Loved Stocks

Will this magical run for the United States' oldest market index, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) ever end? If investors have their say, probably not anytime soon.

The Dow has absolutely been on fire since the recession, with the index up 139% from its closing lows set in March 2009. The nation's unemployment rate is trekking along at a six-year low of 7.2%, the nation's manufacturing sector is expanding at its fastest rate in years, and the housing sector continues to show strength with home prices up practically 13% from the previous year according to the Case-Shiller 20-City Index.

As you might imagine, not everyone agrees that the Dow can possibly head any higher from its current levels given Congress' inability to handle macroeconomic issues like the debt-ceiling over the past two years. Just yesterday we took a closer look at five Dow components that short-sellers have been piling into over the past month with the expectation that the Dow could be ready to decline.

But there's another side to this coin. There's a group of Dow components collectively known as its "five most loved stocks" that short-sellers wouldn't dare bet against. That's why today, as we do every month, I'm going to suggest we take a deeper dive into these five loved Dow stocks. Why, you wonder? Because these companies offer insight as to what to look for in a steady business so we can apply that knowledge to future stock research and hopefully locate similar businesses.

Here are the Dow's five most loved stocks:

Company

Short Interest as a % of Outstanding Shares

General Electric (NYSE: GE  )

0.63%

Wal-Mart (NYSE: WMT  )

0.68%

Procter & Gamble (NYSE: PG  )

0.74%

Chevron (NYSE: CVX  )

0.75%

United Technologies 

0.76%

Source: S&P Capital IQ.

General Electric
Why are short-sellers avoiding General Electric?

  • The primary reason General Electric has ascended to the honor of the Dow's least short-sold stock has to do with its heavily diversified business. While nowhere near as diversified as a giant like Berkshire Hathaway , GE has a myriad of business segments to fall back on including the health care, energy, financials (through GE Capital) and industrial goods sectors. What this means for shareholders is that if one industry is underperforming there are numerous others there to pick up the slack. Let's also remember that short-sellers typically avoid dividend companies as steady dividend payments are often a sign of a stable or growing business.

Do investors have a reason to worry?

  • Based on GE's third-quarter report, I would say the company remains on track to continue delivering gains for shareholders and would certainly suggest pessimists to look elsewhere for ideas. For the quarter, GE reported a record backlog of orders with both the U.S. and austerity-riddled Europe delivering order growth of 18% and 17%, respectively. With strong growth expected in the oil and gas industry over the coming decade and a push from the Obama administration to incorporate cleaner energy sources, including turbines for which GE is a primary manufacturer, I'd say the future remains bright.

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

  • The reason most short-sellers have kept their nose clean of Wal-Mart has to do with the retailer's immense size, which allows it to undercut its peers and control its margins seemingly at will. Although macroeconomic factors do still have some bearing on Wal-Mart's underlying results, short-sellers of the world's largest retailer simply don't see much downside traction outside of a moderate recession. Another factor is Wal-Mart's low beta of 0.28, which means it's only 28% as volatile as the broad-based S&P 500. Short-sellers are typically after a quick dollar and Wal-Mart's small moves typically don't suit their volatility-seeking needs.

Do investors have a reason to worry?

  • Despite Wal-Mart's status as the nation's largest retailer, there are a few disconcerting signs with the U.S. economy that shareholders should keep their eyes on. Consumer confidence is falling once again which acts as both good and bad news for Wal-Mart. Falling consumer confidence figures tend to draw cost-conscious shoppers into its stores and away from competitors which is good news; but it also makes shoppers hold off on discretionary purchases which is where Wal-Mart would be expected to make its beefiest margins. Wal-Mart hasn't delivered its quarterly report as of yet, but I wouldn't be surprised to once again see a negative same-store sales comparison amid a tough retail environment when it does. While Wal-Mart may have little downside, the upside also appears somewhat limited at present as well.

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

  • Like GE, the reason short-sellers have kept their distance from consumer products giant Procter & Gamble is the fact that it has dozens of household brand-name products in its portfolio of which many are price and demand inelastic. In other words, regardless of whether the economy is booming or in a recession P&G is going to be able to maintain strong pricing power and relatively consistent cash flow through the sale of its consumer goods. Procter & Gamble has also boosted its dividend in 56 straight years, which would certainly be enough to scare me away if I were considering betting against this company.

Do investors have a reason to worry?

  • Based on the return of former CEO A.G. Lafley earlier this year and P&G's push into emerging markets where growth rates are much more robust than in the U.S., I don't think current shareholders have much to fear. Procter & Gamble's third-quarter results delivered revenue growth of 2.2% which topped estimates by roughly $160 million while profit topped the Street's forecast by $0.01. What I found to be most impressive was the 4% overall organic growth. With so many companies resorting to share buybacks and cost-cuts to grow their bottom line it's nice to see that large consumer products companies like P&G can still improve pricing and volume to grow its top-line.

Chevron
Why are short-sellers avoiding Chevron?

  • Diversification is a big reason short-sellers tend to avoid many of the Dow stocks on this list and Chevron is no exception. Although Chevron is locked strictly into the oil and gas industry, it has exploration and production assets around the globe, across a number of asset sources (natural gas, natural gas liquids, and oil), and has refining capabilities as well. Although we see oil prices fluctuate which can have a negative impact on Chevron E&P business, lower oil prices can possibly boost refining demand and even crack spreads, helping to balance out a lot of Chevron's downside risk. Also, like the others listed here, Chevron is a dividend aristocrat, having raised its dividend for at least 25 consecutive years, which is often enough to chase away pessimists who question the durability of its business model.

Do investors have a reason to worry?

  • If you read too much into Chevron's third-quarter report, then investors definitely might worry a bit. While Chevron's E&P business was solid, a deterioration in its refining and marketing business caused it to fall well short of Wall Street's profit estimates for the quarter. What investors are ignoring, though, are Chevron's immense offshore assets which is where much of the future value of this company is tied. Chevron can actually offer a quicker growth rate and better dividend yield than many of its peers over the coming decade, which is why I selected it to my Basic Needs Portfolio earlier this year.

United Technologies
Why are short-sellers avoiding United Technologies?

  • Finally we have United Technologies, which continues the prevailing theme of diversity. United Technologies is a diversified technology and instrumentation company supplying products to the aerospace and defense as well as building industries. This means that if one segment of its business is weak there are other products or sectors that can step up to fill the gap. Also like the others, United Technologies pays out a modest 2.2% yield, which has the effect of chasing would-be pessimists away.

Do investors have a reason to worry?

  • The end of the 16-day government shutdown was a big relief for United Technologies, which relies on the government for a significant portion of its defense and aerospace orders. Although we have a temporary fix to the ongoing U.S. debt problems, we could be facing more political sparring in just a hair over three more months. To that end, there are political risks with United Technologies that the previous four companies simply don't have, which could make United Technologies a decent short-sale opportunity. However, I'd also point out that in the third-quarter that United Technologies handily topped estimates on 13% EPS growth which allowed it to boost its full-year profit forecast. Pessimists would be wise not to ignore this earnings beat when taking into consideration their position.

Three Dow dividend-paying stocks that could make you rich
Perhaps the most overlooked but attractive aspect of the Dow is that all 30 components pay a dividend. Why is this important? Because dividend stocks can make you rich over time, and they can offer nearly guaranteed income in both good and bad stock market environments. If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "
The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.


Read/Post Comments (0) | Recommend This Article (3)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2710904, ~/Articles/ArticleHandler.aspx, 9/17/2014 3:59:22 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement