Do These 3 Dow Components Have the Best Long-Term Outlooks?

The Dow just hit its eighth new closing high of 2014, but even so short-sellers are keeping their distance from these three Dow components.

Jun 7, 2014 at 7:01PM

Without sounding too cliche, the Dow Jones Industrial Average (DJINDICES:^DJI) is rising faster than a speeding bullet, and it's certainly more powerful than any locomotive or group of short-sellers at the moment.

Images

Source: Micky Aldridge, Flickr.

As of the end of this week, the iconic U.S. index comprised of 30 of the most diverse globally reaching companies on this planet hit its eighth all-time record high just for 2014. There are a number of factors fueling this surge in the Dow, including continued strength in U.S. manufacturing numbers, historically low lending rates which are fueling business expansion, home prices rising by double-digits year-over-year based on the Case-Shiller 20-City Index, and the U.S. unemployment dipping to levels not seen in more than five years. All of these factors have worked together to drag the U.S. decisively out of the recession and push the auto sector, for example, on pace to potential sell 16 million units in 2014.

Of course, ask around and you'll discover that not everyone is an optimist. Skeptics have had plenty of fodder to feed on despite this precipitous rally, especially considering that most EPS beats have come on the heels of cost-cutting and share repurchases rather than good, old-fashioned organic sales growth. While improving operating efficiencies through cost-cutting helps for a short-time, skeptics understand this isn't a long-term solution to growing corporate EPS.

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. Low levels of short interest may also imply a better long-term outlook than their peers.

Here are the Dow's three most loved stocks:

Company

Short Interest as a % of Outstanding Shares

United Technologies (NYSE:UTX)

0.64%

General Electric (NYSE:GE)

0.64%

Procter & Gamble (NYSE:PG)

0.66%

Source: S&P Capital IQ.

United Technologies
Why are short-sellers avoiding United Technologies?

  • The primary reason that pessimists tend to keep their distance from United Technologies is that it's a cyclical and globally diverse company. In other words, it only makes sense to bet against United Technologies, which is heavily dependent on the industrial and aerospace industries, when the U.S. economy is in bad shape. Also, because United Technologies operates in emerging market economies throughout the world it's able to hedge any downside that does arise in U.S. markets. Of course, let's not also forget that short-sellers typically tend to avoid companies with growing dividends as it's a sign of stability.

G
Source: United Technologies. 

Do investors have a reason to worry?

  • Based on the company's first-quarter results reported back in April, probably not. Although its sales growth was only 2%, it did chalk up 5% organic growth which is fairly impressive when you consider the size of the company. In addition, UTC saw marked strength in China where its Otis Elevator brand grew by 27%, and delivered an 11% increase in large commercial engine spare orders, which is a positive for its Pratt & Whitney unit. Overall, with UTC focused on spending $1 billion on share repurchases, another $1 billion on acquisitions, and $1 billion more on paying down debt in 2014, that sounds like a recipe to keep pessimists away for the time being.

General Electric
Why are short-sellers avoiding General Electric?

  • If you thought United Technologies was diversified, then you're going to love General Electric which has its fingers in a number of industries, including energy, industrials, banking, and even the medical field. Because GE is so diverse from the perspective of its product and service offerings, as well as globally, it remains off the radar of most short-sellers. Don't forget, short-sellers also pay dividends instead of receiving them, and General Electric's 3.3% yield, coupled with its generally low volatility, make it an all-around unappealing company to bet against.

Ge Engine
Source: General Electric.

Do investors have a reason to worry?

  • The time for worry has mostly come and gone for GE. Its biggest crutch has been its finance arm, and slowly but surely General Electric has improved the quality of its remaining financial assets. Furthermore, in March it filed the appropriate paperwork to spin off its credit card unit which may make GE's profitability easier to understand for investors and unlock shareholder value. With GE returning to its roots and focusing on its industrial and energy background there's really nothing short of another deep recession that's going to get in its way. Adding to that, GE ended its latest quarter with $245 billion in backlog, with every operating segment demonstrating a year-over-year increase. Bet against GE? No, thanks!

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

  • Procter & Gamble, the consumer goods giant behind such household products as Tide detergent and Crest toothpaste, gets the nod as the third least short sold stock largely because what it sells are basic needs goods. Whether the economy is booming or Wall Street analysts are quivering in fear under their beds consumers still need detergent to wash their laundry and toothpaste to brush their teeth. With a lineup of basic needs products in its portfolio P&G understands that it has little incentive to lower its prices. As icing on the cake, Procter & Gamble has raised its dividend in a mind-numbing 58 straight years, which should be more than enough to chase any would-be pessimist away.

G
Source: Procter & Gamble.

Do investors have a reason to worry?

  • Now that A.G. Lafley, the current CEO of P&G, has come out of retirement to help the company regain its focus, I'd hardly say investors have a reason to worry. Lafley, who ran P&G through much of the 2000's, has been focused on helping Procter & Gamble shed non-core assets and turn its attention to higher-growth emerging markets which could give it the potential to grow organically by mid-single-digits each year. Thus far it would appear that this radical makeover is working, as P&G's latest quarterly results showed that organic sales grew 3% and core EPS jumped 5% despite a slew of negative foreign currency effects. Healthy price increases and strong emerging market sales helped buoy its results. As long as Lafley remains at the helm P&G shareholders should sleep well at night.

Dow stocks have one key factor in common: great dividends! If you're looking for high-yield income plays, look no further than these picks from our top analysts. 
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

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 and recommends Procter & Gamble. 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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