No matter how hard the short-sellers try, they just can't keep the iconic American index, the Dow Jones Industrial Average (^DJI 0.16%), down. The oldest and potentially most global of all American indexes continues to rack up new all-time highs faster than we as investors can keep track. Austerity measures in Europe? Sequestration at home? A slowdown in growth for China? That's meant diddly-squat for America's leading multinational corporations which have pushed the index to levels nearing 16,000.
Not everyone agrees, of course, that the Dow has what it takes to motor ahead. Yesterday we looked at five Dow components that short-sellers have been swarming like vultures, waiting for them to falter.
On the other hand, certain Dow components just consistently produce profits and grow their business in any environment to the point that they make very poor short-sale candidates. You might call these companies the "Dow's five most loved stocks." More than just loved, these five stocks gives us insight into what to look for in steady businesses so that we can scour the markets and identify similar characteristics in other companies.
Here's a look at July's five most loved Dow stocks:
|
Company |
Short Interest as a % of Shares Outstanding |
|---|---|
|
Coca-Cola (KO +0.46%) |
0.60% |
|
Wal-Mart (WMT 1.60%) |
0.66% |
|
General Electric (GE +0.80%) |
0.73% |
|
Procter & Gamble (PG +2.46%) |
0.80% |
|
McDonald's |
0.88% |
Source: S&P Capital IQ.
Coca-Cola
Why are short-sellers avoiding Coca-Cola?
- There pretty much are no reasons I can think of why Coca-Cola shouldn't be the least short-sold stock every single month. It is the epitome of a globalized company, operating in all but two countries worldwide, with easily one of the most recognizable brand logos in the world. It's no wonder that Interbrand consistently names Coca-Cola the world's most valuable brand for this reason. With big brand recognition, a hefty advertising budget, big-name ambassadors, and a product line-up that'd take nearly a decade to get through, short-sellers have little recourse but to stay away.
Do investors have a reason to worry?
- Admittedly, Coke's most recent quarterly report wasn't its best. Negative foreign exchange translations weighed on EPS while bad weather sapped soda consumption domestically. However, taking currency translation out of the equation and focusing on global consumption, carbonated and still beverage sales rose. There's just no incentive for short-sellers to bet against Coke's incredibly geographic diversity and brand appeal.
Wal-Mart
Why are short-sellers avoiding Wal-Mart?
- I'm a bit surprised to see Wal-Mart's short-shares percentage shrink month-over-month given that it's disappointed Wall Street in its last two quarterly reports. The general reasons why short-sellers tend to avoid Wal-Mart are its ability to undercut its peers on price and easily out-canvas them with regard to product supply. From groceries to clothing and car supplies, Wal-Mart has become a true one-stop-shop. Let's also keep in mind that Wal-Mart's beta (a measure of how volatile it is relative to the S&P 500) is just 0.31, meaning it tends to move only 31% as much as a corresponding move in the S&P 500. Short-sellers love the allure of quick buck and usually latch onto more volatile stocks than Wal-Mart.
Do investors have a reason to worry?
- I'd like to say that because Wal-Mart possesses incredible pricing power that shareholders are in the clear, but there could be some serious hurdles for the world's largest retail chain to conquer in the coming quarters. Higher payroll taxes have really taken a bite out of consumer spending, so Wal-Mart is going to need to be creative in ways to drive up both traffic and ticket sales. Also, food inflation is rarely dormant for a long period of time. If Wal-Mart proves unable to pass along higher food prices to consumers it could chase them to rival grocery chains and see its sales suffer. I'd approach Wal-Mart with skepticism here until it reports its upcoming quarterly results.
Source: Commons.wikimedia.org.
General Electric
Why are short-sellers avoiding General Electric?
- Simply put, what Coca-Cola is to the food and beverage industry, General Electric is to the global manufacturing industry. In addition to its financial arm, GE supplies everything from medical equipment to turbine engines, locomotives, and various other industrial products. Whereas weakness has struck many global financial institutions, some manufacturing hotspots have found success in developed and emerging markets. This was evidenced by GE which recorded a sizable bump higher in its order backlog of 4% to $223 billion in its latest quarter. Its U.S. business really showed some flare with backlog up 20% domestically. With impressive geographic and production diversity, short-sellers do their best to leave GE alone.
Do investors have a reason to worry?
- Investors certainly have nothing to worry about with regard to short-sellers. Instead, a global manufacturing slowdown or deterioration in GE Capital's financial loan portfolio would be the only real concerns for a current shareholder. Over the long run GE appears well positioned to take advantage of a trend toward more efficient energy sources (e.g., it's turbines), while also benefiting from the need to transport consumer goods with increasingly more efficient locomotives. And of course, let's not forget the growing need for medical equipment like MRI machines as our baby boomer population begins to retire. Would I bet against GE? I think not!
Procter & Gamble
Why are short-sellers avoiding Procter & Gamble?
- Short-sellers will typically avoid P&G for the same reasons why I recently selected it as a Basic Needs Portfolio stock: Its products exhibit mostly inelastic demand and inelastic pricing. In English this simply means that regardless of whether the economy is in a recession or booming, people need to buy certain products like detergent and toothpaste. Because of that consistent demand, companies like P&G have little incentive to lower their prices, meaning the trend on many of its consumer goods is to push prices ever higher. With easily recognizable brands, a very low beta, and 56 consecutive years of dividend hikes, short-sellers have every reason to honor the "keep out" sign attached to this stock.
Do investors have a reason to worry?
- The reason for shareholders to worry has come and gone with former CEO A.G. Lafley retaking the helm after a four-year absence. Lafley has been heralded for his leadership of P&G previously and he should be able to take the world's largest advertising budget and use that money to refocus the company's efforts around its core brands . As long as a deep recession doesn't hit the U.S. and force P&G to stoop to competing with non-name-brand consumer goods, I don't foresee many, if any, growth problems on the horizon.
Source: NNECAPA Photo Library, Flickr.
McDonald's
Why are short-sellers avoiding McDonald's?
- I'd say the biggest deterrent that keeps short-sellers out of McDonald's happy meals is that it's been on the leading edge of fast-food innovation for as long as I can remember. McDonald's is globally diversified, has an easily recognizable logo, and sports a remarkably low beta of just 0.25, which tends to discourage short-sellers looking for a quick profit. It also doesn't hurt that McDonald's is currently paying out in excess of a 3% yield!
Do investors have a reason to worry?
- Of the Dow's least short-sold companies, I think shareholders in McDonald's have the most to worry about. In terms of brand, their company is still well recognized globally, and shareholders are poised to reap the benefits of an above-average yield. However, high job turnover, a focus on healthier eating habits, and more rapid innovation from its competitors has left McDonald's at a crossroads that its value menu may not fix this time. In McDonald's second-quarter results released last month it missed on EPS, guided toward weak July sales, and continued to blame weak sales on Europe and the U.S. for its shortcomings. Until we see a marked improvement in same-store sales figures -- at least domestically -- I'd suggest keeping your distance.
