The first quarter has officially come to a close, and what a quarter it was! The Dow Jones Industrial Average (^DJI 0.63%) on multiple occasions eclipsed its previous all-time high as investors bid up America's industrial, technological, and medical juggernauts in hopes of a continued resurgence in the American economy.
Data in recent months would suggest that many aspects of the economy are improving, but not everyone agrees. Skeptics of some of the largest companies in America abound, as is evidenced by these five most hated Dow components:
|
Company |
Short Interest as a % of Shares Outstanding |
|---|---|
|
Alcoa (AA +0.00%) |
6.46% |
|
Intel (INTC 3.00%) |
4.73% |
|
DuPont |
3.77% |
|
Johnson & Johnson (JNJ 0.98%) |
3.64% |
|
Hewlett-Packard (HPQ 1.96%) |
3.03% |
Source: S&P Capital IQ.
What I propose is simple: Let's have a look at why these five Dow components are the most shorted and determine whether or not the lack of faith deserved.
Alcoa
Why are investors shorting Alcoa?
- Investors have dog-piled onto Alcoa because domestic aluminum prices and demand have been weak, and the potential for slowing growth in Europe and the U.S. threatens to keep Alcoa's capacity constrained for years.
Is this short interest deserved?
- I can absolutely understand why investors won't give Alcoa any breathing room because of its production cuts, its idle capacity, and weak aluminum pricing. However, the time to bet against Alcoa has come and gone. There appears to be considerable upside potential and minimal downside potential at these levels, especially if demand from China ramps up.
Intel
Why are investors shorting Intel?
- Microprocessing giant Intel hasn't received an inch from short-sellers after it reported a 27% drop in net income in its fourth-quarter results released in January. Obtaining nearly two-thirds of its revenue from the PC business, Intel noted that a transformational shift in PCs is forcing it to spend heavily on research and development.
Is this short interest deserved?
- Although I really like Intel over the long run, perhaps some short-term skepticism can be understood. Intel is going to need to boost its R&D budget in order to expand its cloud-computing presence and put itself in prime position to garner a big chunk of the cloud-computing hardware market. Combine that with weak PC sales, and Intel's profit could underwhelm for the next few quarters.
DuPont
Why are investors shorting DuPont?
- Chemical and biosciences company DuPont has come under pressure because of its cyclical ties to the global economy. Slowing growth in Europe and the U.S. has hampered its chemical business, negative currency translations have shaved off profit, and layoffs totaling 1,500 people in October have concerned the Street.
Is this short interest deserved?
- Again, as much as I like DuPont for the long term, this is probably an instance where short-sellers have a valid point for concern. DuPont, which is intricately tied to the global economy, has seen strength in its agricultural segment, but it isn't likely to see any meaningful growth until Europe stabilizes and China gets back on track.
Johnson & Johnson
Why are investors shorting Johnson & Johnson?
- Negative sentiment pointed at J&J appears to be squarely based on its valuation. Over the past decade, J&J -- a health care conglomerate that makes pharmaceuticals, medical devices, and personal-care products -- has grown revenue by an average of just 4.9% annually, yet it's trailing P/E and price-to-cash-flow ratio are at their highest levels in about eight years.
Is this short interest deserved?
- No way! J&J's valuation may be a bit higher than it has been in the past, but the company is in the midst of a major growth-revival. The purchase of medical-device maker Synthes last year will help boost its presence in emerging markets, and the approval of revolutionary new type 2 diabetes drug Invokana last week could be the next in a series of blockbusters coming down J&J's pipeline. Bet against J&J at your own peril.
Hewlett-Packard
Why are investors shorting Hewlett-Packard?
- The hatred toward HP is easy to explain. HP's hardware business is struggling due to weakness in PCs, and the company has suffered through poor management that tried to pull HP's identity in multiple directions. Now the company is in the process of reorganizing its operations and shedding 27,000 jobs in the process.
Is this short interest deserved?
- Three months ago I would have been somewhat intrigued by HP's valuation, but after its astronomical first-quarter run higher, I'm once again concerned about its growth potential as it continues its restructuring. Hardware sales haven't shown any meaningful improvement, and I'm not sold on Meg Whitman's ability to innovate HP out of its current predicament.
Which hated Dow company do you have on your radar? Share your thoughts in the comments section below.
