However, not everyone agrees that the market is in better shape than when the Dow last hit all-time highs in 2007. In fact, some data — especially second-quarter enterprise revenue data — would suggest that cost-cutting, rather than top-line growth, is fueling this rally. For those skeptics, I give you the Dow’s five most hated stocks. These are the five companies that carry the highest short interest within the Dow Jones index.
As I did last month, I will examine why these companies draw the short-sellers and determine whether or not that short interest is warranted.
| Company | Short Interest as a % of Shares Outstanding |
|---|---|
| Alcoa Inc (NYSE:AA) | 8.29% |
| Intel Corporation (NASDAQ:INTC) | 4.74% |
| E I Du Pont De Nemours And Co (NYSE:DD) | 3.34% |
| Johnson & Johnson (NYSE:JNJ) | 3.2% |
| Hewlett-Packard Company (NYSE:HPQ) | 2.85% |
Source: S&P Capital IQ.
Alcoa
Why are investors shorting Alcoa Inc (NYSE:AA)?
- Alcoa Inc (NYSE:AA) finds itself with significantly more short interest than it had last month as short-sellers continue to bet against a sustained rebound in aluminum prices and demand. Alcoa Inc (NYSE:AA) has resorted to idling capacity in order to reduce expenses, but it nevertheless stuck to its guns in its first-quarter results by topping EPS expectations and continuing to forecast 7% global aluminum demand growth this year.
Is this short interest warranted?
- This one is tough to call. Between Alcoa’s idle capacity and the fact that China’s economy is growing at a much slower pace than in the previous 30 years, there are certainly ample reasons for investors to remain cautious. However, the outlook for aluminum demand over the long run appears healthy, and the company could turn out to be quite a bargain if other emerging-market regions like Eastern Europe or South America see a big pick-up in demand.
Intel
Why are investors shorting Intel Corporation (NASDAQ:INTC)?
- Although it’s a cyclical company that can deal with the natural ebb and flow of the technology cycle, nearly all of Intel’s pessimism surrounds the continued weakness in PC sales. During the first quarter, according to research firm IDC, PC sales fell 14%, which means Intel needs to invest heavily in research and development in order to rapidly improve and introduce its mobile and cloud chip offerings if it wants to stay ahead of the curve.
Is this short interest warranted?
- I’d say yes and no. Over the short run, Intel Corporation (NASDAQ:INTC) will struggle with lower margins as higher expenses from R&D eat into its bottom line and PC sales continue to weaken. Then again, Intel Corporation (NASDAQ:INTC) is positioning itself to be a leader in cloud-based server hardware and is gearing up to derive 30% of its revenue from its cloud-based hardware segment within the next decade. The company’s ability to generate significant cash flow would be enough to deter me as a short-seller.
DuPont
Why are investors shorting E I Du Pont De Nemours And Co (NYSE:DD)?
- Despite a small drop in short interest, E I Du Pont De Nemours And Co (NYSE:DD) is still attracting its fair share of pessimists who feel that the company’s chemical business is too intricately tied to a fragile European and U.S. economy. The company’s first-quarter report delivered a better-than-doubling in net income, but that was boosted by the $1.9 billion sale of its performance-coating unit. Strip that out, and volume rose by just 2% as Europe dragged on overall performance.
Is this short interest warranted?
- I swear I’m not being willfully ambiguous, but “definitely maybe” is yet again the answer. In the near term, DuPont will struggle to boost its bottom line as Europe remains weak and China’s GDP growth runs below the norm. Over the long run, though, a rebound in China and Europe and the increasing need for food will help boost E I Du Pont De Nemours And Co (NYSE:DD)’s chemicals and agricultural segments. The “X factor” is whether or not the continued rebound in the U.S. housing market can provide a more immediate boon to E I Du Pont De Nemours And Co (NYSE:DD)’s share price.
Johnson & Johnson
Why are investors shorting Johnson & Johnson (NYSE:JNJ)?
- A bet against Johnson & Johnson (NYSE:JNJ) is primarily a bet that the struggles in Europe will continue and that J&J’s growth rate won’t be sufficient to justify its forward P/E of 15. Johnson & Johnson (NYSE:JNJ)’s first-quarter report, however, would suggest otherwise: Domestic sales rose 11.2%, international sales ticked up 6.3% despite a negative 2.4% currency headwind, and adjusted EPS added 5% over the year-ago period.
Is this short interest warranted?
- Of all the most shorted Dow components, this is the biggest head-scratcher by far. Johnson & Johnson (NYSE:JNJ) purchased Synthes last year for $19.7 billion to expand its medical-device presence in rapidly growing markets (taking care of international growth). Earlier this year, it received approval from the Food and Drug Administration for a revolutionary new class of type 2 diabetes drug, Invokana (hello, organic growth!). Seriously? Investors want to bet against this? Dream on!
Hewlett-Packard
Why are investors shorting Hewlett-Packard Company (NYSE:HPQ)?
- On the flip side, Hewlett-Packard Company (NYSE:HPQ) has given short-sellers a laundry list of reasons to dislike the company. Among others, its most recent quarterly report showed revenue declines in all five major segments, it recently shed 27,000 jobs, and an IDC report last week showed an 18.9% drop in Hewlett-Packard Company (NYSE:HPQ) server shipments in North America in the first quarter compared to a 9.9% gain for struggling Dell Inc. (NASDAQ:DELL).
Is this short interest warranted?
- Everyone loves a turnaround story, but Hewlett-Packard Company (NYSE:HPQ) is a long way from having its plan fully implemented. CEO Meg Whitman is certainly an amazing cost-cutter, but I have yet to see what innovations HP will bring to the table to help differentiate its hardware from everyone else’s. Sure, HP is cheap on a forward-earnings basis, but it could get considerably more expensive if all of its business segments keep going in reverse. Here’s a stock the short-sellers have a firm grasp of.
Do these five Dow components deserve this pessimism? Share your thoughts in the comments section below.
The article The Dow’s 5 Most Hated Stocks originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams owns shares of Dell, but has no material interest in any other 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 and Johnson & Johnson.
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