August has been a bit of a rough patch for the iconic Dow Jones Industrial Average (^DJI 0.13%), with the index down a bit more than 4% month to date. But make no mistake about it: The Dow has been on fire this year, hitting multiple all-time highs and convincingly putting the financial meltdown of 2008-2009 in the rearview mirror.
However, as you might have expected, not everyone is on the same page regarding where the Dow Jones will head next. Pessimists have been growing in number as mixed U.S. housing data, rising interest rates, and the potential for conflict with Syria stir up uncertainty that could have a prolonged negative impact on the market. Specifically, five companies within the Dow have drawn a lot of short interest in recent weeks. Let's have a look at which companies within the Dow are most disliked by pessimists so we can better avoid buying into heavily short-sold companies in the future.
Here are the Dow's five most hated stocks as of Tuesday:
|
Company |
Short Interest as a % of Outstanding Shares |
|---|---|
|
Alcoa (AA +0.00%) |
9.78% |
|
Intel (INTC +4.85%) |
4.92% |
|
Caterpillar (CAT 1.79%) |
4.76% |
|
Hewlett-Packard (HPQ +2.96%) |
2.58% |
|
DuPont |
2.36% |
Source: S&P Capital IQ. Data current as of Aug. 27, 2013.
Alcoa
Why are investors shorting Alcoa?
- As should be no surprise by now, Alcoa handily tops the Dow's most short-sold companies -- and with good reason. Alcoa's bottom line is troubled by plenty of idle capacity and notoriously weak global commodity prices, which have been further hurt by a slowdown in China's GDP growth. Short-sellers expect ongoing weakness in metal demand and slower global growth to prevail, which would further pressure aluminum prices and hamper Alcoa's profitability.
Is this short interest warranted?
- The answer is yes -- short-sellers are certainly justified in betting against Alcoa. However, I'd also call it a fool's bet at these levels. The majority of pessimism surrounding Alcoa is likely baked into its share price already. Both Alcoa and Russia's RUSAL have been ardently focused on idling capacity and reducing supply to help buoy aluminum prices. In addition, global demand for aluminum is actually expected to expand by 7% this year, which would signal that we're on the upswing within this cyclical industry. Alcoa still remains a Watchlist-worthy stock that I have on my potential buy list.
Source: Intel Free Press, Wikimedia Commons.
Intel
Why are investors shorting Intel?
- The bet against Intel grew slightly larger this month, with more skeptics expecting Intel to struggle with higher spending for research and development as PC sales shrink. Although Intel is the dominant name in microprocessors, PCs are giving way to smartphones and tablets much faster than anyone had expected, forcing Intel to scramble to find ways to replace a shrinking revenue stream. I don't think short-sellers are actually silly enough to believe Intel is doomed, but I do believe they feel a few years of heavy investments will stymie cash flow and hurt the bottom line.
Is this short interest warranted?
- As I mentioned last month, that really depends on your investing time frame. Over the past couple of weeks, short-sellers have been spot on with their negative call on Intel. There's little denying that PC sales will remain weak over the near term and that Intel will struggle somewaht as it invests heavily in cloud-based hardware and its Atom chips for mobile products. Then again, Intel's cash flow is so impressive that it's now allowing for the company to pay out a 4% yield, all while it controls 85% of the PC microprocessor market and aims to bring in as much as 30% of its revenue from cloud-based hardware by 2020. Intel is a prime selection for my Basic Needs Portfolio, so I'll give you three guesses where I feel Intel is headed -- and the first two don't count!
Caterpillar
Why are investors shorting Caterpillar?
- Caterpillar is the dubious winner for biggest short-interest increase within the Dow this month -- a 107-basis-point increase from July. The thesis here is the same as last month, but since investors have had time to really absorb Caterpillar's most recent earnings report, the pessimists have been coming out of the woodwork. In that second-quarter report, Caterpillar again lowered its full-year revenue and EPS forecast, with sales shrinking by 16%. For the past six months, Caterpillar has pretty much cut estimates through 2015 across the board. With most commodity prices still weak, short-sellers expect mining activity and heavy-duty construction orders to be tepid at best.
Is this short interest warranted?
- Although I'm bullish on Caterpillar over the long run, I can completely understand why short-sellers have piled into Caterpillar in the interim. Caterpillar's latest earnings report was absolutely dismal, and it would take quite the rapid surge in commodity prices to cause Caterpillar to boost its revenue and EPS estimates. Unless we see a rapid improvement in Brazil, Russia, or China's GDP growth rates, Caterpillar may continue to struggle come earnings time.
Source: David Precious, Flickr.
Hewlett-Packard
Why are investors shorting Hewlett-Packard?
- The bet against HP is similar to the bet being made against Intel -- that PCs are ceding market share more quickly than anyone imagined. HP is making strides to improve its cloud-based software and printing division, but the scope of the shift away from PCs caught HP by surprise. The end result for HP has been massive layoffs focused on reducing expenses by $3.5 billion annually and increased R&D spending that will move the company's core line of products into the cloud. In the meantime, short-sellers anticipate that HP will struggle on the top line, which is why they've been piling into the stock.
Is this short interest warranted?
- Had you asked me when HP was under $15, I may have said, "Not so much." With the share price still well above $20, I feel short-sellers may definitely be onto something. In all fairness to optimists, HP is still capable of producing a lot of cash flow, which, in its own right, should help buoy the share price. Then again, consumer PC sales were so atrocious in its third-quarter results reported last week (down 22%) that I don't see how you can be all that positive on HP. Even software revenue, which comprises its cloud segment, saw a revenue increase of just 1%. With HP noting that revenue is unlikely to increase, even next year, I think short-sellers may prove to have a firm grasp on this company for at least the next couple of quarters.
DuPont
Why are investors shorting DuPont?
- Of the five Dow components here, DuPont saw the most sizable drop in short interest from last month. The drop is a bit odd, given that the reason short-sellers have latched onto DuPont -- its lack of top-line growth and consumer backlash against crop nutrient providers -- remains as valid as ever. In the second quarter, DuPont delivered a 1% decline in revenue from the prior-year quarter, lending little hope to optimists that it's turning the corner.
Is this short interest warranted?
- Yes and no. DuPont's weak growth since the recession has left me perplexed, and its cost-saving methods will only pull its EPS so far. Then again, it has a very low beta, which tends to be a deterrent to short-sellers looking for a quick buck, and it's perfectly positioned in the agricultural segment to help improve crop yields around the world. With the population expected to increase dramatically over the next decade, DuPont has a chance to become considerably more profitable than it is now.
