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The Dow's 5 Most Hated Stocks

http://www.fool.com/investing/general/2013/07/07/the-dows-5-most-hated-stocks.aspx

Sean Williams
July 7, 2013

What happens when the unstoppable force known as the Dow Jones Industrial Average (INDEX: ^DJI) meets the immovable object known as short-sellers? Thus far, the answer to that question is that the skeptics get run over and knocked out of their shoes.

The Dow Jones has been an index to marvel at over the past four years, bouncing from the 6,500's to greater than 15,000 on the heels of a recovery in the jobs market, the housing market, and ongoing accommodative monetary easing from the Federal Reserve.

But as history has shown us on numerous occasions, peaks and troughs are the natural evolution of the economic cycle. Skepticism is certainly warranted given our fresh all-time highs and a worrisome lack of substantive growth in Europe and China. With that in mind, I propose we again take a look at the Dow's five most hated companies (essentially those with the highest short interest) and determine why they are universally disliked and ultimately decipher whether this pessimism is fully warranted.

Company

Short Interest As a % of Shares Outstanding

Alcoa (NYSE: AA)

8.72%

Intel (NASDAQ: INTC)

4.62%

Caterpillar (NYSE: CAT)

3.26%

Pfizer (NYSE: PFE)

3.08%

DuPont

2.81%

Source: S&P Capital IQ.

Alcoa
Why are investors shorting Alcoa?

  • Yet again, aluminum maker Alcoa tops the list of the Dow's most short-sold companies by quite a bit. The case against Alcoa is pretty simple: aluminum prices are down in the dumps and oversupply issues are still problematic meaning Alcoa has little choice but to accept weak prices and continue to sell its products at lower margins, or to idle some of its capacity in the hope that a reduction in supply helps improve its pricing power. For Alcoa, it's taken to reducing capacity and crossing its fingers that ongoing infrastructure growth in China and a rebounding U.S. economy helps boost demand. 

Is this short interest warranted?

  • I'd certainly say that short-sellers have every reason to be skeptical of Alcoa, and they've been perfectly justified in their doubts with the stock hitting a fresh multi-year low last week. It's going to take a few quarters before Alcoa's reduced production begins to affect its pricing power and boosts its bottom line, but it will ultimately be a long-term positive for aluminum pricing. As such, I actually have Alcoa on my Watchlist as a potential buy candidate for my personal portfolio. While I don't expect a miraculous overnight turnaround, I see shares worth double where they're at within three-to-five years.

Source: Intel Free Press, Flickr.

Intel
Why are investors shorting Intel?

  • The faster-than-expected demise of the personal computer is practically the entire reason why short-sellers have dog piled into Intel. As the overwhelming leader in microprocessors for PC's -- boasting a market share of 85.2% in the first quarter -- Intel has the biggest cliff to contend with if PC sales continue to dip by double digits. Instead, Intel is being forced to spend even more on R&D to align itself to succeed in a cloud-computing based world. These higher expenses are likely to constrain its profits over the next couple of quarters, if not longer.

Is this short interest warranted?

  • If you can look beyond 2013, then I feel Intel is an incredibly sound investment that short-sellers would be smart to shy away from. Intel has a real opportunity to become the dominant hardware player in cloud-computing via servers and big data centers. Intel is also playing its hand as the processor of choice in tablets and smartphones, although it's had only minimal success so far in these areas. Even though PCs are slowing, its dominance of the microprocessor market delivers predictable cash flow and a rapidly growing dividend that made Intel a perfect selection for my Basic Needs Portfolio. To make a long story short, no, this short interest isn't warranted!

Caterpillar
Why are investors shorting Caterpillar?

  • If there's any company within the Dow Jones' 30 components that should see it short interest rising, it's Caterpillar. The maker of heavy duty construction equipment lowered its annual profit forecast in April as mining companies slowed production and halted expansion/drilling plans in the wake of weak metals prices. What's more, since April the metals market has gotten even worse. Gold prices are off about 20% and the prospect of additional mine shutdowns or production cuts is likely. Although Caterpillar doesn't derive all of its revenue from mining companies, it's a big enough chunk that another forecast cut could be on the way.

Is this short interest warranted?

  • I believe this question is best answered based on your investing timeframe. Short-sellers are often out there looking for a quick buck, and with a beta of nearly two, it means Caterpillar is almost twice as volatile as the S&P 500, giving these skeptics the volatility they're looking for. This means that as Caterpillar tweaks its forecast over the near-term, short-sellers are very likely to gain the upper hand. Beyond 2015, though, it looks as if emerging market demand has the potential to outweigh any weakness China, Europe, or the U.S. could have to offer, and would make Caterpillar an intriguing play yet again.

Source: e-Magine Art, Flickr.

Pfizer
Why are investors shorting Pfizer?

  • It's been quite the turnaround for Pfizer, which last month was the third least short-sold company out of the Dow's 30 components and is now the fourth most short-sold. I can only assume the big surge in short shares has to do with two factors. First, the company is in the midst of dealing with a steep patent cliff. It lost the previous best-selling drug in the world, Lipitor, to patent expiration in 2011, and will lose blockbuster Celebrex in 2015. Secondly, with many shareholders tendering their Pfizer shares for the animal health segment spinoff Zoetis investors are concerned that without the slow but steady growth of Zoetis Pfizer's bottom line may suffer.

Is this short interest warranted?

  • Even though Zoetis is one of my favorite animal health companies, it accounted for less than 8% of Pfizer's total revenue, so it shouldn't be a terribly big loss. The key for Pfizer to be successful moving forward will be how many new blockbusters it can bring to market. Blood thinner Eliquis, which was co-developed with Bristol-Myers Squibb and approved in December, could