The Dow Jones Industrials (^DJI -0.86%) include 30 of the most secure stocks in the U.S., with blue-chip names that have impeccable reputation in most investment circles. That makes Dow stocks stalwarts for investors looking for long-term gains. But even high-quality Dow stocks attract short-sellers who are interested in profiting from downward market moves, and by looking at the stocks they've targeted as being most likely to fall, you can get an idea of prevailing trends in the markets.
Among the top four Dow favorites among short-sellers, you'll find several different themes. Intel (INTC -2.27%) leads the list with more than 4% of its outstanding shares sold short. But you'll also find Caterpillar (CAT -0.89%), with a short position of almost 3.5%. Rounding out the top four are telecom rivals Verizon (VZ 0.52%) at 3.1% and AT&T (T 0.00%) at 2.9%. Why are these stocks most likely to drop in short-sellers' eyes?
Catching up is hard to do
Intel has been a fairly obvious short-selling target for a long time, as many investors have been skeptical about the chipmaker's ability to keep bringing in profits from the declining PC industry. At the same time, Intel has been relatively slow in identifying the importance of the mobile revolution, and only now has it started to ramp up its mobile-chip offerings in an effort to catch up with faster-moving competitors.
That said, short-selling Intel shares definitely leaves you vulnerable to a quick reversal. The tech giant has many valuable assets at its disposal, including its in-house foundries that Intel could offer to outside third-party users to take advantage of its state-of-the-art manufacturing capabilities. Moreover, even if PCs keep declining, the glide path of that decline could still bring profits to Intel for decades, especially given the company's dominance.
Caterpillar has had its own difficulties in catching up -- in its case, with the growth prospects in the rest of the economy. Construction and infrastructure activity have slowed in many key areas of the world lately. Moreover, as it turned out, Caterpillar got itself into the mining-equipment business at just about exactly the wrong time, and the company now has to weather the storm of plunging commodities prices and hope that it can come out the other side of the cyclical downturn unscathed. Most short-sellers know that permanently shorting cyclical stocks is usually a bad move, but over the past couple of years, it's been a reasonably profitable bet.
Going to war
Meanwhile, for AT&T and Verizon, the short case is fraught with peril because the two stocks are the highest-yielding dividend payers in the Dow. That means that when you borrow shares, you also have to make payments in lieu of dividends to the investors you borrowed the stock from. That adds to the cost of the short and makes it even more important to get a quick payout.
Right now, short-sellers hope that the discounting skirmishes among the top four U.S. carriers will blossom into an all-out price war, as that could send shares of every company in the industry downward at exactly the same time. Already, AT&T has had to cut its prices and offer lucrative discounts to poach customers from other carriers, and Verizon will likely have to follow suit at some point. If competition keeps heating up, then short-sellers could be right about the telecom giants.
Be careful out there
Short-selling carries unlimited risk and limited profit potential, so it's important to know what you're getting into before you sell stocks short. But every investors can learn from the arguments of short-sellers with their stocks -- even if they choose to take the other side of their trade.