Few Stocks Are Loved As Much As These 3 Dow Components

For those of you who've been waiting for the psychological 17,000 mark to be hit, it's officially a reality now for the iconic Dow Jones Industrial Average (DJINDICES: ^DJI  ) .

There have been a number of factors which have pushed America's index ever higher since the recession. Perhaps nothing is more front and center of late than the improvement in the jobs market. As noted by the U.S. Labor Department on Thursday, 288,000 nonfarm payroll jobs were created in June, marking the fifth straight month payroll creation topped the 200,000 mark and ultimately pushing the unemployment rate to just 6.1%.


Source: Brian Glanz, Flickr.

But, it's much more than just growth in the jobs market. Consumers are spending more and feeling more confident about their short-term and long-term economic outlook. Since U.S. GDP is so intricately tied to consumer spending, this would imply that the rally could continue on for many more years. In addition, the housing market has rebounded in terms of both total sales and home prices as lending rates have remained enticingly low, encouraging business expansion and homeowners to purchase or refinance big ticket items (including their homes).

Of course, not everyone is in agreement that the Dow can head higher after gaining roughly 10,500 points in just over five years. Keep in mind that historically low lending rates have spoiled consumers, and when the Federal Reserve does begin raising rates as expected in 2015 it could cause a rapid deterioration in sales of big ticket items and homes which are often financed.

Also, skeptics will point out that the jobs market isn't as healthy as the 6.1% unemployment rate would make it appear. A steadily falling labor participation rate brought about by baby boomers retiring from the workforce has resulted in practically flat real jobs growth since 2008. Finding a job if you're unemployed hasn't been much easier with the mean duration of unemployment about twice as long as it was before the recession.

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

Procter & Gamble (NYSE: PG  )

0.64%

General Electric (NYSE: GE  )

0.69%

United Technologies (NYSE: UTX  )

0.7%

Source: S&P Capital IQ.

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

  • There's a reason Procter & Gamble is now the least short-sold stock in the Dow Jones Industrial Average. Primarily, this is because a majority of its consumer goods are basic-needs items. Basic-needs goods are purchased in both good and bad economic environments, and because they're consumer staples there's rarely any need for P&G to discount these items in order to drive consumers to purchase. The end results is consistent cash flow and unsurpassed pricing power. In addition, Procter & Gamble isn't very volatile. In fact, it's a downright "boring" stock to most short-sellers who are often short-term minded and looking for a quick buck. Its beta of just 0.40 (meaning it's only 40% as volatile as the S&P 500) makes it an easy stock to pass up for short-sellers. Finally, having a 58-year streak of dividend increases in its corner is but one more reason why pessimists keep their distance.


Source: Procter & Gamble.

Do investors have a reason to worry?

  • The biggest challenge for Procter & Gamble is reigniting its growth engine which had stalled in the U.S. under the now-retired Bob McDonald. The turnaround began with bringing back A.G. Lafley, who led P&G to incredible success in the 2000's. Since his return Lafley has sold off non-core assets and pushed P&G to solid volume gains in overseas markets. Furthermore, Lafley is targeting brand-image more than product pushing in the U.S. which has demonstrated encouraging signs in the early going. Unless P&G somehow has difficulty passing along price hikes to consumers then there's little reason for shareholders to lose sleep at night.

General Electric
Why are short-sellers avoiding General Electric?

  • Two words: business diversity. General Electric has its fingers in so many different industries that if one is performing poorly there's a good chance that another is there to pick up the slack. GE has interests in the energy, health care, and industrial sectors, just to name a few. From wind turbines to MRI's General Electric is sitting on a gold mine of long-term growth opportunities that it'll be looking to exploit. Also, the main reason to bet against GE, its financial arm GE Capital, is largely improved since the recession with a good chunk of its subpar assets sold off. With GE Capital no longer a concern General Electric has been able to boost its dividend back to a 3.3% yield -- and we know how much short-sellers dislike high-yielding dividend stocks!


Source: General Electric.

Do investors have a reason to worry?

  • The biggest concern for GE investors is no longer the financial arm so much as another global recession. CEO Jeff Immelt has been crystal clear about his intentions to position GE to earn roughly 70% of its profits from the industrials industry. This means a heavy focus on power generation and necessitates that the global economy keeps clicking on all cylinders. Possible integration issues with its nearly $17 billion purchase of Alstom's energy assets in France could also be a short-term negative. However, aside from these "what if's" GE looks poised to continue to deliver for shareholders over the long run. With a solid dividend, improving backlogs, and revenue increases in all sectors as of its latest quarter, I wouldn't recommend pessimists pull the trigger against GE.

United Technologies
Why are short-sellers avoiding United Technologies?

  • In similar fashion to GE, and as I've stated in previous months when United Technologies took the top honor, pessimists tend to keep their distance here because of a mixture of business diversity and economic cyclicality. Simply put, United Technologies only makes sense to bet against when the U.S. economy is in bad shape, because an expansionary economy likely means the U.S. government is spending freely. Furthermore, its ties to a number of industrial sectors allows its top-line to be somewhat hedged against economic weakness. Its Otis elevator division, for instance, is likely to do well in any economic environment because it's not as if elevator demand or servicing needs stop just because U.S. GDP dips into negative territory.


Source: United Technologies.

Do investors have a reason to worry?

  • Whereas GE investors have to worry about a global recession, United Technologies investors would be more inclined to be worried about a slowdown in domestic spending. Although United Technologies is doing what it can to improve its emerging market presence, it still receives a tidy sum of its annual revenue from the U.S. government. Therefore, any additional budget cuts could theoretically make it tougher for United Technologies to grow its business. However, the company's 2% yield, $7.5 billion in trailing 12-month operating cash flow, and the fact that it's cyclical in nature (and we're in an undeniable bull market) are all reasons why short-sellers would be wise to keep their distance for the time being.

One of the greatest lures of Dow stocks are their dividends. Here are a handful of recent high-yield 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.


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