The Dow's 5 Most Loved Stocks

It has certainly been a year of milestones for the iconic Dow Jones Industrial Average (^DJI -0.98%) which has recovered from its March 2009 deep recession lows in the 6,500 range to hit multiple new all-time highs this year, topping 16,000 as of Friday's close.

This whirlwind rally has been precipitated by generally positive economic data across the board. U.S. GDP growth of 3.6% for the third-quarter demonstrates a stronger growth rate than we've seen all year and signals, at least to some extent, that the Federal Reserve's monetary easing policies are encouraging borrowing on a consumer and enterprise level. The jobs picture would also coincide with this theory, as the Bureau of Labor Statistics reported on Friday that the unemployment rate dipped to a fresh five-year low at 7% as 203,000 nonfarm payroll jobs were created in November. With the exception of a few data points, this rally has all the catalysts needed to continue.

Something else this rally has is skeptics. As Fool Morgan Housel noted recently, it's perhaps one of the most hated rallies of all time. I can definitely be lumped in with skeptics at times because I've noticed a pattern of increased stock buybacks and cost-cutting which are driving profits higher rather than traditional sales growth which is what Wall Street would prefer to see.

Despite this group of dissenters, there exists a select group of Dow components known as its "most loved" 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:

Source: S&P Capital IQ.

Source: Dave Sizer, Wikimedia Commons.

Boeing
Why are short-sellers avoiding Boeing?

• Despite numerous problems with Boeing's next-generation airplane, the 787, Boeing has managed to keep short-sellers at bay by announcing numerous contract wins and keeping its labor unions satisfied. The thought among pessimists had been that Congress' inability to come up with a bipartisan budget would trigger spending cuts that would hurt the defense sector the most and affect Boeing's bottom-line results. What we've seen is the opposite with a new contract announcement rolling in practically every month. In return, what few short-sellers there are here have likely been squeezed out of their positions as Boeing flies higher.

Do investors have a reason to worry?

• Following Boeing's astronomically strong year, I definitely think some skepticism is warranted. The potential for a labor union strike always concerns me and it's quite clear that even with Boeing's staggered revenue for its contracts that it could struggle over the next couple of years as the U.S. government reins in its overzealous defense spending. Boeing is a company I like with a low double-digit P/E. At 18 times forward earnings, we're getting into rarefied air for a company that will historically only grow organically by mid-single-digits.

General Electric
Why are short-sellers avoiding General Electric?

• Just as we examined last month, the reason short-sellers have kept their distance from General Electric is its growing diversity. With everything from energy to health care products, GE's diversified product lineup is geared to survive almost any economic environment. Couple its improved results with a strengthening capital balance sheet for its financial arm as well as a 2.8% yield and you have every reason needed to keep short-sellers away.

Do investors have a reason to worry?

• The way I see it, there are only two factors that could really derail GE here. First, there's always the potential for another recession which would negatively impact its finance operations just as they're beginning to turn the corner. The other downside possibility would be a sharp decline in oil and natural gas prices which would hurt alternative energy demand and potentially curb wind turbines sales. Both seem like a long shot to occur based on the strength being exhibited by the U.S. economy at present, and given GE's double-digit percentage gain in orders from Europe, China, and the U.S. I'd say that things are motoring along nicely.

United Technologies
Why are short-sellers avoiding United Technologies?

• In similar fashion to Boeing, United Technologies has been a big beneficiary of a more subtle drop in government spending than expected. The diversified aerospace and industrials company also got a boost from the end of the 16-day government shutdown in early October, which appears to have affected the economy in a much smaller way than initially expected. Having generated more than $6 billion in free cash flow over the trailing 12-months and yielding 2.1%, United Technologies simply doesn't offer short-sellers the immediate downside catalysts that they're often seeking.

Do investors have a reason to worry?

• Also, like Boeing, I'm a bit concerned about how reduced government spending over the coming two to three years could impact United Technologies' top-line growth. I'm not too concerned about United Technologies being able to grow earnings as there are ample cost-cutting opportunities afforded to it, as well as the opportunity to repurchase its own shares -- but a lack of top-line growth would be worrisome. For now United Technologies looks on track with revenue growth of 5% expected in fiscal 2014, but I'd keep a close eye on domestic orders as that'll drive investor sentiment over the coming years.

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

• Another reason short-sellers tend to avoid certain stocks is that they aren't volatile enough to make for attractive downside investments. Consumer goods giant Procter & Gamble, for instance, offers dozens of consumer products for sale, many of which are inelastic in that they sell in both booming and miserable economic environments (if you think about it, you need laundry detergent and toothpaste no matter what!). What this means for Procter & Gamble is that it always maintains strong pricing power which keeps its cash flow relatively steady, leading to few quarterly earnings surprises.

Do investors have a reason to worry?

• Unless the U.S. economy falls off a cliff, P&G might be one of the safest names out there. You will certainly give up some growth potential as an investor in Procter & Gamble as it's saturated many industrialized nations around the globe; however it does offer incredible growth potential in emerging markets like Latin America and Southeast Asia. With a dividend that's grown in size for 56 straight years, I'd probably suggest short-sellers look elsewhere for ideas.

Chevron
Why are short-sellers avoiding Chevron?

• There are a couple factors at work here that generally keep short-sellers on the sidelines when it comes to integrated oil giant Chevron. First, Chevron is a dividend aristocrat, having raised its dividend for at least 25 consecutive years, and short-sellers tend to avoid companies that pay a high yield as it often signifies a healthy company with few downside catalysts. Another factor is that Chevron's business is diversified. When oil prices drop and its exploration and production business feel the pain, the company's refineries step up and pick up the slack. When oil prices are soaring, we often see the opposite effect. Finally, oil is a finite quantity product so there's a psychological floor on pricing which helps maintain strong cash flow for Chevron.

Do investors have a reason to worry?

• This question really depends on your investing timeframe. If you're only looking out over the next six months or less, Chevron has a lot of questions marks to contend with including its delayed $6.4 billion gas project in China with PetroChina as well as numerous other assets that have proved too expensive to build-out, such as its Rosebank development in the North Sea, or where protests made exploration not viable such as in Romania. These question marks could all negatively impact Chevron over the near-term, but Chevron's strategic diversity should allow it to handily outperform over the long run.