These 4 Dow Stocks Are on Short-Sellers' Hit List

These companies have the most investors betting against them. Are they right?

Feb 8, 2014 at 11:01AM

The Dow Jones Industrials (DJINDICES:^DJI) include 30 of the most secure stocks in the U.S., with blue-chip names that have impeccable reputation in most investment circles. That makes Dow stocks stalwarts for investors looking for long-term gains. But even high-quality Dow stocks attract short-sellers who are interested in profiting from downward market moves, and by looking at the stocks they've targeted as being most likely to fall, you can get an idea of prevailing trends in the markets.

Among the top four Dow favorites among short-sellers, you'll find several different themes. Intel (NASDAQ:INTC) leads the list with more than 4% of its outstanding shares sold short. But you'll also find Caterpillar (NYSE:CAT), with a short position of almost 3.5%. Rounding out the top four are telecom rivals Verizon (NYSE:VZ) at 3.1% and AT&T (NYSE:T) at 2.9%. Why are these stocks most likely to drop in short-sellers' eyes?

Www
Image source: Rafael Matsunaga, Flickr.

Catching up is hard to do
Intel has been a fairly obvious short-selling target for a long time, as many investors have been skeptical about the chipmaker's ability to keep bringing in profits from the declining PC industry. At the same time, Intel has been relatively slow in identifying the importance of the mobile revolution, and only now has it started to ramp up its mobile-chip offerings in an effort to catch up with faster-moving competitors.

That said, short-selling Intel shares definitely leaves you vulnerable to a quick reversal. The tech giant has many valuable assets at its disposal, including its in-house foundries that Intel could offer to outside third-party users to take advantage of its state-of-the-art manufacturing capabilities. Moreover, even if PCs keep declining, the glide path of that decline could still bring profits to Intel for decades, especially given the company's dominance.

Caterpillar has had its own difficulties in catching up -- in its case, with the growth prospects in the rest of the economy. Construction and infrastructure activity have slowed in many key areas of the world lately. Moreover, as it turned out, Caterpillar got itself into the mining-equipment business at just about exactly the wrong time, and the company now has to weather the storm of plunging commodities prices and hope that it can come out the other side of the cyclical downturn unscathed. Most short-sellers know that permanently shorting cyclical stocks is usually a bad move, but over the past couple of years, it's been a reasonably profitable bet.

Going to war
Meanwhile, for AT&T and Verizon, the short case is fraught with peril because the two stocks are the highest-yielding dividend payers in the Dow. That means that when you borrow shares, you also have to make payments in lieu of dividends to the investors you borrowed the stock from. That adds to the cost of the short and makes it even more important to get a quick payout.

Right now, short-sellers hope that the discounting skirmishes among the top four U.S. carriers will blossom into an all-out price war, as that could send shares of every company in the industry downward at exactly the same time. Already, AT&T has had to cut its prices and offer lucrative discounts to poach customers from other carriers, and Verizon will likely have to follow suit at some point. If competition keeps heating up, then short-sellers could be right about the telecom giants.

Be careful out there
Short-selling carries unlimited risk and limited profit potential, so it's important to know what you're getting into before you sell stocks short. But every investors can learn from the arguments of short-sellers with their stocks -- even if they choose to take the other side of their trade.

Don't let short-sellers intimidate you
It's important to invest, even when short-selling traders think your stocks will go down in value. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers