Although the Dow Jones Industrial Average (^DJI +0.81%) isn't plucking off new high after new high like the broader-based S&P 500, it's seen a better than 1,000-point rebound in a little over a month as U.S. economic data has walked a fine line between healthy growth and remaining in need of the Federal Reserve's slowly waning economic stimulus known as QE3.
On one hand, U.S. GDP growth in third quarter was an incredible 4.1%, the unemployment rate has dipped to 6.7% from a peak of 10%, and low lending rates have allowed homeowners and business to refinance debt or expand for historically inexpensive rates. On the other hand this has also been coupled with weakening loan originations and subdued fourth-quarter GDP growth (2.4% as of the second estimate), which could encourage the Fed to reduce the tapering of QE3.
Source: Raphaelstrada, Flickr.
This good, but not great, growth mentality has stirred up quite a number of short-sellers to take positions betting against a market that they believe has come too far, too fast. Considering that the Fed has artificially kept lending rates low, and it takes twice as long, on average, to find a job now when you're unemployed as it did six years ago, there's certainly some merit to this skepticism.
Despite this group of dissenters, there exists a select group of "most loved" Dow components that short-sellers wouldn't dare bet against. That's why today, as we do every month, I suggest we take a deeper dive into these five loved Dow stocks. Why, you wonder? Because these companies offer insight as to what to look for in a steady business so we can apply that knowledge to future stock research and hopefully locate similar businesses.
Here are the Dow's five most loved stocks:
|
Company |
Short Interest as a % of Outstanding Shares |
|---|---|
|
United Technologies (UTX 0.55%) |
0.64% |
|
Chevron (CVX +1.05%) |
0.73% |
|
Nike (NKE +1.28%) |
0.73% |
|
Wal-Mart |
0.76% |
|
American Express (AXP +2.48%) |
0.79% |
Source: S&P Capital IQ.
United Technologies
Why are short-sellers avoiding United Technologies?
- As we examined last week when United Technologies also wiggled its way into the top five most loved S&P 500 stocks, its business diversification is a primary reason why short-sellers tend to keep their distance. Because United Technologies manufacturers everything from aircraft engines to elevators, there's a decent chance that at least one segment can pick up the slack when others are struggling. It also helps, too, that United Technologies' was able to post a year-over-year operating income improvement of 53% in the fourth-quarter from continuing operations. With a fairly steady stream of cash flow short-sellers have been sent running for the hills.
Do investors have a reason to worry?
- As I noted last week, the primary concern on every United Technologies investor should be the magnitude by which the government is reducing federal spending. Although United Technologies isn't wholly reliant on government contracts, the 16-day government shutdown last year wreaked havoc on a number of its segments. This has to be at least a bit of a concern from a longer-term revenue growth perspective. However, as long as United Technologies is able to control its costs and enhance shareholder value through dividends and stock buybacks, then there's a good chance it'll stay off most pessimists' radars.
Chevron
Why are short-sellers avoiding Chevron?
- Integrated oil and gas giant Chevron, despite its recent weakness, manages to keep short-sellers at bay because it provides a basic-necessity product. Not only is the need for fossil fuels growing, and the Obama administration encouraging as much domestic production as possible, but Chevron is vertically integrated, having operations ranging from exploration and production to the refining of crude oil. While weak refining spreads hurt Chevron this past quarter, having these integrated segments provides the ability to leverage its clout in the oil and gas industry.
Do investors have a reason to worry?
- If you're an extremely short-term-minded investor, then refining margins, while improving, could still hamper Chevron for the foreseeable future. However, if you're looking at the bigger picture – the one in which Chevron has positioned itself with nearly two dozen huge natural gas finds off the coast of Australia and a number of other potentially lucrative offshore assets around the globe – then Chevron is doing just fine. With a premium yield of 3.5% I'd suggest pessimists keep their distance from Chevron.
Nike
Why are short-sellers avoiding Nike?
- Pessimists tend to do their best to sidestep footwear and accessories maker Nike primarily because of its brand-name power. As we looked at last month, Interbrand, which ranks global businesses based on their own metric of brand value, placed Nike at 24th-most valuable in the world in 2013. Because the Nike swoosh is easily recognizable and relates hand-in-hand with active consumers and sporting events, Nike can practically allow its products to sell themselves.
Do investors have a reason to worry?
- Following its second-quarter earnings results, where revenue grew by 8% and worldwide future orders jumped 12%, I'd say Nike is pretty much in the clear. Nike has shown incredible resilience by branching out into new accessories beyond footwear and announced new partnerships which have improved brand awareness. Perhaps the one kink in its armor has been weak and inconsistent growth in China which is somewhat tough to explain. If Nike can somehow figure out the Chinese consumer better, there's a really good chance it could have more upside potential.
Wal-Mart
Why are short-sellers avoiding Wal-Mart?
- It's not too difficult figuring out why Wal-Mart is among the most avoided stocks by short-sellers since it's the world's largest retailer. Being the biggest retailer has its perks, such as being able to undercut prices of competitors in order to gain market share. Wal-Mart's size gives the company incredible negotiating leverage when it comes to purchasing goods, and its wide diversity of products has turned the company into something of a one-stop shop for a number of consumers.
Do investors have a reason to worry?
- You might think with its size that Wal-Mart is impervious to economic weakness, but that isn't the case. Wal-Mart relies heavily on tax refunds to drive growth around this time of year, so any government delays in getting consumers their refunds, or any major reduction in the amount of refunds issued, could adversely impact Wal-Mart's year-over-year comparisons. This is, though, a very short-term concern. Over the long-term Wal-Mart continues to meet the consumers' needs and it has a strong allure for cost-conscious consumers. At 13 times forward earnings, I could find much better short-sale opportunities than Wal-Mart.
Source: Images Money, Flickr.
American Express
Why are short-sellers avoiding American Express?
- Lastly we have credit services company American Express which tends to keep short-sellers at bay because there's a massive moat of under-banked people outside the U.S. As consumer credit usage grows domestic and payment processing networks are installed in emerging markets, American Express has the opportunity to gain millions of new merchants and credit card holders. Plus, as a direct lender of credit, during robust economic times, AmEx is able to double-dip and collect interest from its loans as well as processing fees from its merchants.
Do investors have a reason to worry?
- I certainly haven't been shy about my preference of Visa or MasterCard within the credit payment processing realm, but as long as the global recovery continues without too many hiccups AmEx may actually have a chance to outperform both. Investors will want to closely monitor consumer credit growth as well as AmEx's push into the U.S. prepaid debit card market because these are likely to be the near-term indicators that will determine how high AmEx can fly. Over the long run, though, AmEx's push into emerging market should send its share price even higher.
