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It's not hard to be optimistic about the prospects for the broad-based S&P 500 (SNPINDEX: ^GSPC  ) with the index closing yesterday at a new all-time high. The jobs picture continues to slowly improve and the majority of companies within the S&P 500 have blown past, or at least met, Wall Street's earnings expectations thus far in the second-quarter. In a shade over four months, the S&P 500 is up 13% for the year.

While not all investors agree that the market will head higher, short-sellers have certainly kept their distance from a select few S&P 500 components. Today, just as we did last month, I intend to look at the five least short-sold S&P 500 components and decide whether or not current shareholders have any reason to worry.


Short Interest as a % of Shares Outstanding

Berkshire Hathaway (NYSE: BRK-B  )




Precision Castparts (UNKNOWN: PCP.DL  )


Loews (NYSE: L  )


Marsh & McLennan


Source: S&P Capital IQ.

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

  • Just as we saw last month, there's really not a justifiable reason to bet against Berkshire Hathaway unless you believe there's going to be a major deterioration in the overall economy. Even then, it wouldn't make a lot of sense to bet against Berkshire, given that its 57 owned businesses cover a variety of sectors which would spread out its potential risk.

Do investors have a reason to worry?

  • As long as Warren Buffett is involved in the decision-making process shareholders can sit back and relax. Buffett and his trusted assistant Charlie Munger love boring companies that simply make money. Berkshire's portfolio is filled with well-diversified, established companies, and Berkshire has been rewarding shareholders with share repurchases of its own stock thanks to an abundance of cash on hand. This certainly isn't a formula any short-seller would dare mess with.

Why are short-sellers avoiding AES?

  • It appears the primary reason for short-sellers to avoid AES, a global power company, is the fact that it reaffirmed its full-year EPS forecast in April. Although the company's first-quarter EPS guidance would signal an EPS reduction from the year-ago period, the simple fact that it stuck to its original guidance and operates in many rapidly growing emerging markets has short-sellers on the run. 

Do investors have a reason to worry?

  • This is a case where I'm having a difficult time understanding why the short interest is so low. AES certainly isn't expensive at just 11 times this year's earnings, but the company has struggled in recent years with unfavorable currency translations, weak foreign energy demand, and a mountain of debt that currently totals $21.4 billion. Enough uncertainty exists here that I think shareholders should remain on their toes.

Precision Castparts
Why are short-sellers avoiding Precision Castparts?

  • Precision Castparts, a manufacturer of metal components and products for the aerospace and energy industries, has benefited from a rebounding economy. An improving jobs outlook and stable costs would signal a good potential for growth in the metal fabrication business. With a price-per-share of nearly $190 and a revenue growth rate forecast to average about 20% over the next two years, short-sellers have all the reasons they need to pass.

Do investors have a reason to worry?

  • Although I agree that Precision Castparts' revenue growth is phenomenal and its high share price can be quite the deterrent to attractive short-sellers, I'm a bit concerned that the company has missed Wall Street's EPS projections in three straight quarters. Furthermore, the company's annual dividend of $0.12 is a slap in the face to income-seeking investors (a yield of just 0.1%). Unless the company can meet or beat EPS estimates next quarter, I'd look for short interest to rise as I fail to see many long-term catalysts.

Why are short-sellers avoiding Loews?

  • Not to be confused with the home improvement retailer, Loews is a commercial property and casualty insurance company. As you might imagine, unless you have a crystal ball that can predict disasters, insurance companies are rarely strong short-sale candidates, since they can adjust premiums higher to offset unprofitable policies.

Do investors have a reason to worry?

  • Based on Loews' first-quarter results announced this week, optimists' thesis is certainly being tested. Net income dropped 34% relating to catastrophe losses from Superstorm Sandy, as well as a myriad of other one-time charges. However, insurance companies have a knack for turning a profit and using catastrophes as the justification for raising their premiums. With this company still valued $4.25 below book, I doubt current shareholders have too much to worry about.

Marsh & McLennan
Why are short-sellers avoiding Marsh & McLennan?

  • I believe the primary reason short-sellers are keeping their distance from Marsh & McLennan is the company's incredible consistency. The professional services firm consistently delivers revenue growth in the 4%-5% range and, in its first-quarter results reported this week, delivered 16% growth in adjusted operating income. With demonstrable growth in North America as well as overseas, shorts-sellers have been kept at bay. 

Do investors have a reason to worry?

  • Shareholders probably have little to worry about in the way of short-sellers here. Marsh & McLennan's business tends to be tied to the overall health of the economy; so unless things go sour rather quickly, it should be fine. In addition, short-sellers often love the allure of the "quick buck." With Marsh & McLennan sporting a low beta of 0.74, it isn't exactly a volatile stock and will normally stay off most short-sellers' radars on that accord alone.

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Related Tickers

9/26/2016 4:35 PM
^GSPC $2146.10 Down -18.59 -0.86%
S&P 500 INDEX CAPS Rating: No stars
AES $13.12 Down -0.14 -1.06%
The AES Corporatio… CAPS Rating: **
BRK-B $144.18 Down -0.82 -0.57%
Berkshire Hathaway… CAPS Rating: *****
L $39.90 Down -0.22 -0.55%
Loews CAPS Rating: ***
PCP.DL $0.00 Down +0.00 +0.00%
Precision Castpart… CAPS Rating: *****