Investors often look to the Dow Jones Industrial Average for stocks that have stable profits, global exposure, universally recognized brands, and a general level of safety. But this hardly means that Dow stocks can’t fall. While several are in strong uptrends, such as Disney (NYSE:DIS) and Exxon Mobil (NYSE:XOM), others are not.
The stocks I mention below appear to have made intermediate tops, and this means that the “smart money” is selling them on rallies before they can reach their recent peaks. Investors who own shares in these companies need to reevaluate their investment theses in light of this, or at the very least they need to ask themselves what it is that they think they know that sellers don’t.
1. General Electric (NYSE:GE)
General Electric is one of the pillars of the Dow, with a universally recognized brand and a reputation for manufacturing quality products. However, in 2008, investors forgot about these aspects of GE and focused on just one segment of this conglomerate: GE Capital. This one segment wound up almost destroying the company. But while the company has tried to emphasize its other segments, the fact remains that General Electric is in large part a financial stock, and financials are not in favor at the moment. If we consider that industrials are also out of favor, we can see why the company’s shares have failed to surpass their December peak.
The company’s earnings have followed suit, with a sizable double-digit decline in the first quarter. Meanwhile the company remains highly leveraged thanks to its finance business. Still, the shares trade at over 18 times earnings despite the fact that investors are paying about two-thirds of that for financials. With declining earnings and exposure to out-of-favor sectors, GE continues to be vulnerable to the downside, and for this reason I think the stock will continue to roll over.
2. JPMorgan (NYSE:JPM)
This is another financial that is vulnerable to the downside. JPMorgan is the largest financial stock in the Dow, and it has been rolling over since peaking in March. Financial stocks have been out of favor given the low interest rate environment (banks make a lot of money based on interest income) and the fact that financial regulations have forced the company to curtail its trading business to a large extent.
This is being reflected in the company’s earnings, which are falling in the double digits. The company is also facing a potential succession as its CEO, Jamie Dimon, is on medical leave. Investors like certainty, and uncertainty regarding the company’s leadership means that investors are less likely to pay up for the shares. Thus, despite the fact that the stock trades at just 14 times earnings, I suspect that the shares have further downside.
3. DuPont (NYSE:DD)
DuPont is in the unfortunate position of being, on the one hand, the leader in a lousy industry (industrial chemicals) and on the other hand, a second-rate player in a good industry (genetic engineering and related pesticides). While it is good that the company is transitioning out of the former, its emphasis on the latter is about 14 years too late, given Monsanto’s (NYSE:MON) dominance. As a result, DuPont is generating weaker earnings and guiding down for the future, meaning that there is more pain to come.
Despite this weakness, the shares trade at 21 times earnings, which is way too high for a struggling company. As a result, the stock has begun to roll over since peaking in June, and the stock is already down more than 7 percent, which is a lot for a Dow company. But given DuPont’s valuation and given its weak earnings, I suspect that we can see a lot more weakness in the near future, and I would sell any shares if I owned them.
Disclosure: Ben Kramer-Miller has no position in the stocks mentioned in this article.