The Dow's 3 Most Loved Stocks

Skeptics may question the valuation of the Dow Jones Industrial Average, but you won't find short-sellers hovering around these three most loved Dow components.

Apr 10, 2014 at 5:16PM

Yesterday's release of the minutes from last month's Federal Open Market Committee meeting were all the spark the Dow Jones Industrial Average needed to fire up and motor higher. This has been the modus operandi of the Dow over the past couple years: cruise past all major worries and keep moving up.

Stock Chart Going Up

Source: OpenClips, Pixabay.

A number of factors continue to drive the Dow higher, including improved U.S. GDP growth of 4.1% and 2.6% for the third and fourth quarters, respectively; a near-multiyear low in the unemployment level of 6.7%; a strong rebound in retail sales, including the best year for autos since 2007; and the continuation of near-record-low lending rates, which are allowing consumers to refinance at attractive rates and encouraging businesses to hire and expand using debt financing.

But not everyone agrees that the market, or the Dow, could head higher. Skeptics, such as myself, would be quick to point out that the drawdown of quantitative easing could expose bond prices to downward pressure since the Fed isn't buying as many long-term Treasuries. Because bond prices and bond yields have an inverse relationship, we could be staring down higher interest rates within the next couple of quarters, which has the potential to bring housing growth and job expansion to a grinding halt.

In addition, a number of companies have stepped up their cost-cutting and share buybacks in an effort to mask weak top-line growth. While certainly serving their purpose of boosting shareholder value, these tools aren't sustainable long-term solutions to keep the rally going.

Despite this group of dissenters, there exists a select group of "most loved" Dow components that short-sellers wouldn't dare bet against. That's why today, as we do every month, I suggest we take a deeper dive into these three 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 three most loved stocks:


Short Interest as a % of Outstanding Shares

United Technologies (NYSE:UTX)


General Electric (NYSE:GE)


Wal-Mart (NYSE:WMT)


Source: S&P Capital IQ.

United Technologies
Why are short-sellers avoiding United Technologies?

  • It certainly wouldn't have been my initial guess, but aerospace and industrial juggernaut United Technologies is the Dow's least short-sold stock. The reasoning behind that optimism is threefold. First, United Technologies has been able to grow both its top and bottom line despite fears of a reduction in government spending. With this "worst is behind us" attitude, optimists have been bidding United Technologies' shares even higher. Second, the company's multiple business segments keep it highly diversified. In other words, if one segment struggles there's an opportunity for another to shine and hedge its downside. Finally, United Technologies last month reaffirmed its 2014 earnings-per-share and revenue forecast of $6.55-$6.85 on $64 billion in sales, crushing short-sellers' expectations that its growth was slowing.

Do investors have a reason to worry?

  • United Technologies has strong cash flow and a well-diversified business model, so the only factor that investors really need to concern themselves with is government spending. As I noted above, it appears that many of the steep budget-cut rumors were overstated; however, it's still worth noting that while revenue grew 9% last year, it rose by just 2% in the fourth quarter. It'll pay for investors to monitor in the upcoming quarter whether this revenue swoon is a sign that government spending is still questionable or if this was a one-time blip.

General Electric
Why are short-sellers avoiding General Electric?

  • As with UTC, there are a number of easily identifiable reasons why short-sellers stay away from General Electric. Perhaps the largest is General Electric's business diversity. Because GE has its fingers in everything from building turbines for the energy sector to diagnostic machines in the health care industry, there's a good chance that even if the economy weakened, at least a few of GE's segments would outperform. Second, GE's recovery remains on track, with its most recent quarterly report showing a backlog increase to $244 billion, global sales up 13% in growth markets and 8% in the U.S., and overall orders up 8% in total. So long as General Electric's top and bottom lines are headed in the right direction, pessimists are being kept at bay. Lastly, GE's dividend has bumped up to 3.4%, and short-sellers tend to avoid high-yielding companies, as that payment will come out of their own wallet.

Do investors have a reason to worry?

  • I don't believe investors have much to worry about with GE. The company made all of the right and necessary moves to shore up its financial arm since the recession, leading to a loan portfolio of much improved quality, and has been quick to raise its dividend when possible to demonstrate that it's focused on returning profits to shareholders. With so many avenues of growth in the energy and health care sectors, I don't see why anyone would go out of their way to bet against General Electric.

Source: Walmart, Flickr.

Why are short-sellers avoiding Wal-Mart?

  • Finally, we have the king of all retailers: Wal-Mart. There are two key reasons why short-sellers tend to keep their distance from Wal-Mart. First, Wal-Mart is so massive and has such impressive cash flow that it can literally walk all over local mom-and-pop stores. This comparative advantage based on price and product diversity provides a good reason to never bet against the company. Also, short-sellers tend to be very short-term-oriented, and Wal-Mart's beta of 0.4 means it's not very volatile. Its sluggish movement provides enough of an impetus to keep pessimists away.

Do investors have a reason to worry?

  • While I don't think I'd ever have the gall to bet against Wal-Mart -- nor would it make a lot of sense, given its strong cash flow -- its business isn't exactly booming, either. In its last fiscal year, Wal-Mart's combined same-store sales (including Sam's Club) fell 0.4%, hurt by the IRS furloughs that delayed federal refunds to a number of taxpayers. With higher taxes expected this year, the amount of refunds doled out by the IRS may drop even further, which could be bad news for Wal-Mart. Put another way, although I wouldn't bet against Wal-Mart, I also consider its upside to be limited at the moment.

Who Doesn't Love a Dividend?
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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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