It was truly an amazing first quarter for the Dow Jones Industrial Average (^DJI 0.31%). The U.S. markets' oldest continuing index gained 11.3% for the quarter and set multiple all-time record highs.
As you might expect, when the market has such a rapid run higher, investors can get quite skeptical. This is why I examined the five most hated Dow components from a short interest perspective last week. Some I proposed have been unfairly bet against, while pessimists in other Dow components have every reason to be skeptical. Today, I suggest we turn the tables and look at the Dow's least short-sold, and thus most-loved, companies.
|
Company |
Short Interest as a % of Shares Outstanding |
|---|---|
|
Coca-Cola (KO 0.18%) |
0.77% |
|
General Electric (GE 1.18%) |
0.84% |
|
Merck (MRK +2.85%) |
0.87% |
|
ExxonMobil |
0.90% |
|
Procter & Gamble (PG +0.12%) |
0.91% |
Source: S&P Capital IQ.
Just as we did last week, we'll first take a look at why short-sellers might be avoiding these five names and then pass judgment on whether investors have anything to worry about.
Coca-Cola
Why are short-sellers avoiding Coca-Cola?
- It really shouldn't come as a shock to anyone that Coca-Cola is the least short-sold component of the Dow 30, as it's the most valuable brand name in the world, according to research firm Interbrand. Operating in all but two countries worldwide, Coca-Cola holds 15 of the 33 biggest revenue-generating non-alcoholic beverage lines in its portfolio of drinks.
Do investors have a reason to worry?
- Absolutely not! Coca-Cola has a 51-year streak of raising its dividend and also has the global diversity and product line to survive any economic downturns without much pain. About the only true concerns Coca-Cola investors need to keep their eyes on are rapidly rising food costs (i.e., sugar), and unfavorable currency translations overseas, which can reduce Coke's bottom-line profits.
General Electric
Why are short-sellers avoiding GE?
- Some companies are still recovering from the financial crisis of 2008-2009, but GE's recovery is well under way. In its fourth-quarter results, it announced a record $210 billion backlog, delivered 8% organic industrial growth, and demonstrated continued health in its GE Capital financial arm, whose tier 1 common ratio rose to 10.2%. In addition, GE's plans to split up its energy business into three segments have investors excited that shareholder value will soon be unlocked.
Do investors have a reason to worry?
- Short-sellers probably have very little control over GE until it splits up its energy business. Organic growth in nearly all segments has been far too strong to continue to bet against GE, and its dividend growth since it slashed its payout during the recession has also been phenomenal. There are still plenty of reasons to like GE here.
Merck
Why are short-sellers avoiding Merck?
- Short-sellers' avoidance of Merck appears to be due to its high dividend yield (3.9%) and its ability, thus far, to navigate the patent cliff with grace. Merck lost its blockbuster asthma drug Singulair to patent expiration last year and this year will lose Temodar and Maxalt, which contributed around $1.5 billion in annual sales. Even so, Merck is still expected to earn about $11 billion in profits this year.
Do investors have a reason to worry?
- I've been an advocate in favor of Merck in the past, but I'm honestly concerned about the disruptive potential that new SGLT2 inhibitors Invokana by Johnson & Johnson and Forxiga by Bristol-Myers Squibb and AstraZeneca could have on the Type 2 diabetes market. Merck's Januvia -- a $4.1 billion drug -- was beaten fair and square in a head-to-head trial with Invokana, which the FDA just approved. I'd say Merck shareholders definitely have a few concerns on their plate.
ExxonMobil
Why are short-sellers avoiding ExxonMobil?
- As the world's largest oil company by revenue, ExxonMobil shouldn't garner too much short interest. Having diversified assets around the world gives ExxonMobil immense pricing power and cash flow that few other integrated oil and gas companies possess. ExxonMobil is also the largest corporate dividend payer, pumping out $10.75 billion in dividends to shareholders annually.
Do investors have a reason to worry?
- The two biggest concerns for integrated oil and gas companies of Exxon's size are political worries and the underlying price of oil. The first worry is but an afterthought for ExxonMobil, which has operations around the globe and is shielded from major production snafus. A big drop in the price of West Texas Intermediate or Brent crude, though, could be a problem. Weakness in the eurozone and a lack of strength in the U.S. economy could trigger some minor worries, as that could ultimately result in lower oil demand from those regions. However, over the long run, investors in ExxonMobil should be sleeping well at night.
Procter & Gamble
Why are short-sellers avoiding Procter & Gamble?
- Consumer-products company Procter & Gamble is rarely going to draw the ire of short-sellers because the majority of what it sells is very price-inelastic. In other words, regardless of whether the economy is up or down, P&G is still going to make the sale to the consumer. In its second-quarter results released back in January, P&G delivered 3% organic growth and grew its market share in many domestic segments.
Do investors have a reason to worry?
- If we were looking at P&G a year ago, I'd have said there was cause for concern. However, P&G has adjusted its prices and more effectively used its marketing tactics, including social media, to reach out to its consumer base. Organic growth of 3% might be unimpressive, but for a consumer-products company of its size that's facing slowing spending in the U.S. and Europe, that's phenomenal. P&G isn't a company I'd recommend any short-sellers bet against.
Which Dow component would you most like to call your own? Share your thoughts in the comments section below!
