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The Dow's 5 Most Loved Stocks

Sunday - 5/5/2013, 7:00pm  ET

If last decade was the "lost decade," then this decade is certainly something of a rebirth for the markets, which have more than doubled off their recession lows. The Dow Jones Industrial Average , which is made up of a mix of 30 diversified sectors leaders that encompass the health of the overall economy and has symbolized the strength of the American stock market for nearly 200 years, hit an all-time intraday record high above 15,000 on Friday.

Four years ago, none of this would have been even remotely imaginable; however, a series of enterprise cost cuts and favorable monetary policy from the Federal Reserve has the U.S. economic train firmly back on the tracks. Not everyone agrees that the markets can necessarily head higher, but few investors would dare bet against the Dow's five most loved stocks.

As we did last month, I propose examining the five Dow Jones companies with the least amount of short interest, determine why short-sellers are avoiding them, and offer my opinion on whether or not shareholders have anything to worry about.

Company

Short Interest As a % of Shares Outstanding

Coca-Cola

0.77%

General Electric

0.80%

Wal-Mart

0.84%

Procter & Gamble

0.86%

Pfizer

0.88%

Source: S&P Capital IQ.

Coca-Cola
Why are short-sellers avoiding Coca-Cola?

  • Coca-Cola retains its position as the Dow's least short-sold stock for the second month in a row on the simple fact that it's the most valuable brand in the world according to Interbrand. Having such an easily recognizable brand-image, and selling its products in all but two countries around the globe, Coca-Cola has the global diversity that most companies would die to achieve. It also doesn't hurt that Coke has raised its dividend in 51-straight years which tends to detract short-sellers.

Do investors have a reason to worry?

  • If you want to worry about something, make it your favorite sports team or whether your favorite store is going to have its much-anticipated sale, because Coca-Cola is about as safe a stock as they come! In its first-quarter report in April, global volume grew by 4% and net revenue, excluding the impact of unfavorable currency effects, rose 2%. With demonstrable and steady organic growth domestically and in overseas markets, Coke could be the perfect company for conservative investors to place in their individual retirement accounts.

General Electric
Why are short-sellers avoiding GE?

  • Also retaining its position as the second least short-sold stock in the Dow is GE which saw its short interest drop slightly month-over-month. This is understandable, as GE's first-quarter results added fuel to the fire that its rebound will continue. Overall, operating earnings rose 15% as the conglomerate delivered double-digit industrial revenue growth in five of its nine markets. Furthermore, GE Capital, the segment responsible for nearly taking GE down during the recession, reported a 9% increase in profits. 

Do investors have a reason to worry?

  • As with Coke, GE isn't giving short-sellers any reason to latch on. Growth has been regularly coming in ahead of expectations for two-plus years now, and GE's financial arm has been slowly improving its loan portfolio quality and liquidity. Also, plans for GE's energy segment to split into three separate companies are only bound to unlock shareholder value by improving revenue and profit visibility. This isn't a company I'd recommend short-sellers bet against, even if its European business came in weaker than expected in the most recent quarter.

Wal-Mart
Why are short-sellers avoiding Wal-Mart?

  • Retail kingpin Wal-Mart makes its debut as the Dow's third least short-sold company in April primarily because of its retail diversity and unrivaled pricing clout. In February, when it reported its fourth-quarter results, Wal-Mart delivered modest, but steady, 1% comparable-store sales growth in the U.S., with international net sales jumping better than 7%. With the ability to undercut local competition and deliver unparalleled product diversity, few short-sellers will bet against this king of retail.


Source: Commons.wikimedia.org. 

Do investors have a reason to worry?

  • The combination of higher payroll taxes and, more importantly, delayed tax refunds is certainly taking a bite out of Wal-Mart's bottom line to start the year. This alone could have a very short-term negative effect on Wal-Mart's share price and vindicate short-sellers. However, over the long run, Wal-Mart's pricing clout is simply too strong for me to suggest making an extended bet against the company.
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