August has been a bit of a rough patch for the iconic Dow Jones Industrial Average (INDEXDJX:.DJI), with the index down a bit more than 4% month to date. But make no mistake about it: The Dow Jones Industrial Average (INDEXDJX:.DJI) 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 anticipated, not everyone is on the same page as to where the Dow Jones Industrial Average (INDEXDJX:.DJI) will head next. Pessimists have been growing in numbers as mixed U.S. housing data, rising interest rates, and the potential for conflict with Syria are all stirring up emotions and uncertainty that could have a prolonged negative impact on the market. Specifically, five companies within the Dow have drawn quite the interest of short-sellers in recent weeks. Let’s have a look at which companies within the Dow Jones Industrial Average (INDEXDJX:.DJI) are most disliked by pessimists so we can use that knowledge to potentially avoid buying into heavily short-sold companies in the future.
Here are the Dow Jones Industrial Average (INDEXDJX:.DJI)’s five most hated stocks as of yesterday:
| Company | Short Interest As a % of Outstanding Shares |
|---|---|
| Alcoa Inc (NYSE:AA) | 9.78% |
| Intel Corporation (NASDAQ:INTC) | 4.92% |
| Caterpillar Inc. (NYSE:CAT) | 4.76% |
| Hewlett-Packard Company (NYSE:HPQ) | 2.58% |
| DuPont | 2.36% |
Source: S&P Capital IQ; data current as of 08/27/13.
Alcoa Inc (NYSE:AA)
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 Inc (NYSE:AA)’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 GDP growth in China. Short-sellers expect ongoing metal demand weakness and slower global growth to prevail which would further pressure aluminum prices and hamper Alcoa Inc (NYSE:AA)’s profitability.
Is this short interest warranted?
- The answer is “yes,” that short-sellers are certainly logical for their bet against Alcoa, but I’d also refer to it as a fool’s bet at these levels. The majority of pessimism surrounding Alcoa is likely baked into its share price already. Both it 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, not a downtrend, 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 Corporation (NASDAQ:INTC)
Why are investors shorting Intel?
- The bet against Intel grew ever so slightly larger this month as opposed to last month, with more skeptics expecting Intel Corporation (NASDAQ:INTC) to struggle with higher spending for R&D all while PC sales shrink. Despite being the dominant name in microprocessors, PCs are giving way to smartphones and tablets much faster than anyone had expected, causing Intel Corporation (NASDAQ:INTC) 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 bottom-line profits.
Is this short interest warranted?
- As I mentioned last month, that really depends on your investing timeframe. 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 Intel will somewhat struggle 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 . As a prime selection for my Basic Needs Portfolio, I’ll give you three guesses where I feel Intel is headed, and the first two don’t count!
Why are investors shorting Caterpillar?
- Caterpillar Inc. (NYSE:CAT) 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 very much 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 Inc. (NYSE:CAT) 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.
Why are investors shorting Hewlett-Packard?
- The bet against Hewlett-Packard Company (NYSE:HPQ) is a very 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’ll move the company’s core line of products into the cloud. In the meantime, short-sellers anticipate that Hewlett-Packard Company (NYSE:HPQ) 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 definitely feel short-sellers may 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 wind up with a firm grasp on this company for at least the next couple of quarters.
DuPont
Why are investors shorting DuPont?
- Of the five Dow Jones Industrial Average (INDEXDJX:.DJI) components here, DuPont had the most sizable drop in short interest from last month. The drop is a bit odd given the reason that short-sellers have latched onto DuPont — its lack of top-line growth and consumer backlash against crop nutrient providers — remains as steadfast as ever. In the second-quarter, DuPont delivered a 1% decline in revenue over the previous year, lending little hope to optimists that it’s turning the corner.
Is this short interest warranted?
- Partly yes and partly no. DuPont’s weak growth since the recession has left me very 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.
The article The Dow’s 5 Most Hated Stocks originally appeared on Fool.com is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends Intel.
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