The Dow's 3 Most Loved Stocks

Pessimists may be coming out of the woodwork, but short-sellers still won't go anywhere near these three Dow components.

May 10, 2014 at 7:01PM

This may not be a picture-perfect earnings season by any stroke of the imagination, but that hasn't stopped the Dow Jones Industrial Average (DJINDICES:^DJI) from racking up additional all-time highs.

Stock Market Up

Source: Geralt, Pixabay.

The most iconic stock market index of them all, consisting of 30 global and diverse juggernauts, has benefited from a number of economic factors, perhaps none more so than ongoing low lending rates. Low lending rates have given businesses a chance to expand for a relatively low cost of interest, helping to boost hiring, lower unemployment, and raise productivity and hourly wages for workers. All told, investors are basking in a six-year low in unemployment and double-digit rises in both the stock market and housing prices over the trailing 12-month period.

Yet in order to have a market you have to have pessimists as well -- and trust me, you don't need to look far to find them. Naysayers have been coming up out of the woodwork recently disparaging the Dow's meteoric rise and pointing to factors such as corporate cost-cutting and share buybacks which are doing most of the work on the EPS front instead of actual organic growth. In addition, the sharp drop in the unemployment rate has been primarily attributed to a drop in the labor force participation rate rather than actual jobs growth on a constant participation basis.

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:

Company

Short Interest as a % of Outstanding Shares

General Electric (NYSE:GE)

0.7%

American Express (NYSE:AXP)

0.72%

Nike (NYSE:NKE)

0.75%

Source: S&P Capital IQ.

General Electric
Why are short-sellers avoiding General Electric?

  • As we've seen in prior months, the primary reason short-sellers tend to keep their distance from General Electric is because of its diverse business segments. Conglomerates like General Electric are better equipped to deal with economic weakness due to having their fingers in a number of sectors that tend to be able to weather the storm, such as energy with its wind turbines, and health care via its MRI diagnostic machines. With a considerably better capitalized financial arm and profitability coming from all segments, short-sellers have decided to look elsewhere.

General Electric Grid
Source: General Electric.

Do investors have a reason to worry?

  • I have to admit that GE's first-quarter results weren't terribly impressive, but all things considered with the polar vortex disrupting half the country in Q1, it was pretty much in-line with most investors' expectations. Total revenue dipped by 2% while adjusted EPS fell 15%, but notable progress was witnessed in its power & water, and oil & gas segment. GE has the tools capable of cutting costs to boost its profits, but that's not really in its nature. With steady growth prospects over the long run in a number of sectors and its dividend on the way up again (currently yielding 3.4%), I'd suggest short-sellers continue to keep their distance.

American Express
Why are short-sellers avoiding American Express?

  • Simply put, while consumers have been cautious about adding additional debt, consumer credit has been rising predictably for years now signaling that American Express' profits are likely to rise. In times of economic growth American Express can actually double-dip by making money as a payment transaction facilitator from merchants, as well as collecting interest from consumers who borrow money vis-a-vis their AMEX card. We are in arguably a strong period of consumer credit expansion meaning American Express' bottom-line should be increasing as well. As icing on the cake, the company raised its quarterly dividend by 13% to $0.26 in March and announced its intention to repurchase $4.4 billion in common shares this year, giving pessimists more than enough reasons to stay away.

Credit Cards Axp
Source: Republica, Pixabay.

Do investors have a reason to worry?

  • The only thing optimists really should concern themselves with if they own AmEx is the delinquency rate of consumers. AmEx's double-dip benefit becomes a crutch when consumer defaults and late-payments begin to rise, so it's the key figure investors should be watching. Over the long-term American Express has a number of key partnerships and is strong enough to survive just about anything thrown its way. In other words, short-sellers may have small pockets of success against AmEx during economic downturns, but they're liable to be eaten alive over the long run.
Air Jordan

Source: Nike.

Nike
Why are short-sellers avoiding Nike?

  • There are few companies around the globe who've done a better job of branding their product than footwear, apparel, and accessories specialist Nike. Its logo is one of the most widely recognized in the world, and it has a history of selecting ambassadors to represent the brand that are leaders in their field. The end result has been steady growth prospects and the expectation of high single-digit growth over the coming years. This growth, combined with its low volatility that short-minded pessimists often dislike, give short-sellers plenty of reason to pass on Nike.

Do investors have a reason to worry?

  • The only concern Nike shareholders should have is the company's minimal success in China thus far. Nike's product hasn't sold as well in China compared to its peers and it may need to spend more in this fast-growing market to educate people about the brand in order to help them form an emotional bond with the company. Aside from tepid growth in China it has been business as usual for Nike. Worldwide futures orders were up 12% as of its latest quarter with EPS rising by 4% to $0.76. I'd love to see its dividend tick a bit higher, but there's more than enough growth here to ward off short-sellers for the foreseeable future.

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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, and recommends Nike. It also owns shares of General Electric and recommends American Express. 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.

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