5 Dow Stocks Short-Sellers Are Too Scared to Bet Against

Among the Dow's 30 stocks, these companies have the fewest short-sellers thinking they'll go down. Why not make money from them?

Feb 9, 2014 at 9:02AM

The 30 stocks in the Dow Jones Industrials (DJINDICES:^DJI) are all well-regarded companies with fine reputations, but after a strong five-year run, the Dow's recent turbulence has many short-sellers thinking that they can make money betting on a downturn. Yet those short-sellers aren't confident that all of the Dow 30 will drop, as they've shied away from betting against several stocks. Among them are consumer giants Procter & Gamble (NYSE:PG) and Nike (NYSE:NKE), which many see as defensive stocks that can rely on their valuable brand names in any economic environment. But also among the least popular short-sale candidates are industrial giants General Electric (NYSE:GE) and United Technologies, as well as big-oil stalwart Chevron (NYSE:CVX). None of these stocks has more than three-quarters of a percent of their outstanding shares sold short right now.


It's not valuation
Interestingly, among these five stocks, only Chevron has a particularly low earnings multiple. Short-sellers often avoid cheaply valued stocks because they don't necessarily have much further to fall, and if a value stock suddenly comes into vogue, it can jump quickly and cause big losses for short-sellers. Chevron does have the challenge of finding ways to grow in an industry with stagnant prices lately and the challenges of keeping oil and gas production levels up, but with a relatively high dividend yield, Chevron also poses a problem for short-sellers who want to avoid high carrying costs for their short positions.

Yet for the other stocks, valuations aren't particularly low. Procter & Gamble and Nike actually sport fairly high valuations, reflecting the perception that they'll be less likely to drop significantly as other Dow stocks in the event of a downturn. Nike's impressive growth rates arguably justify its premium share price better than P&G's more challenging situation. But both companies have invested billions in building up their respective brands, and both expect to use those brands to keep their profits up and establish a growing presence throughout the world as millions of consumers ascend to middle-class status internationally.

Full steam ahead
Meanwhile, the industrial sector has been firing on all cylinders recently, and that has helped to propel both General Electric and United Technologies to impressive returns. Both GE and United Tech have exposure to the booming commercial aircraft industry, with both companies supplying Boeing with essential components for a wide range of airplane models that the aerospace giant sells.

Yet both companies also have other exposure to the industrial economy, and in both cases, their other divisions have helped contribute to profits. GE's has made a huge foray into the energy segment, bolstering its alternative-energy offerings like wind turbines with conventional oil and gas services to create a budding energy empire. United Technologies has its elevator and commercial HVAC businesses to support the conglomerate's overall revenue and earnings. Unless the somewhat troubling economic reports we've seen in the past couple of weeks turn into signs of a longer-term downturn, short-sellers could well remain reluctant to bet on an imminent reversal of fortune for United Technologies or GE.

No guarantee ...
Of course, just because short-sellers aren't targeting a stock doesn't mean it can't drop. But if those who bet against stocks for a living don't think a certain stock is worth the risk, it could point to better results for those willing to buy shares.

... but you should still invest
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Chevron, Nike, and Procter & Gamble and owns shares of General Electric and Nike. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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