The S&P 500's 5 Most Loved Stocks

Investors certainly have every reason to sing "Let the Good Times Roll" out in the streets this year, as the broad-based S&P 500 (SNPINDEX: ^GSPC  ) has risen by 14% year to date.

If it could go right, it has for the U.S. stocks this year with the housing market continuing to stabilize, the unemployment rate remaining steady or ticking modestly lower, and a majority of companies topping Wall Street's earnings estimates. Combined, these factors helped push the S&P 500 to an all-time record closing high of 1,669 in May.

But as we witnessed yesterday, skepticism in a few companies within the S&P 500 is growing -- and with good reason. However, for the majority of S&P components short-sellers have learned to keep a safe distance and not stand in front of the runaway train. Just as we've done in prior months, I propose we again look at the five most loved (i.e., least short-sold) S&P 500 components, examine why investors seem to love these companies, and decipher whether or not shareholders have anything to be concerned about.

Company

Short Interest As a % of Shares Outstanding

Berkshire Hathaway (NYSE: BRK-B  )

0.00%

News Corp.

0.00%

Nike (NYSE: NKE  )

0.54%

Loews (NYSE: L  )

0.58%

Marsh & McLennan (NYSE: MMC  )

0.60%

Source: S&P Capital IQ.

Source: Fortune Live Media, Flickr.

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

  • If diversity is the key to surviving economic downturns, then consider Warren Buffett's Berkshire Hathaway the king of all conglomerates. The past couple of deals for Berkshire really demonstrate its growing diversity and strength. It purchased railroad company BNSF to get a stranglehold on consumer-goods and petroleum shipments, gobbled up Heinz to rake in its steady condiments cash flow, and recently announced the acquisition of NV Energy to tap into Nevada's growing energy demand and NVE's alternative energy potential. Even if one area of the economy is doing poorly, the chances are good that another segment of Berkshire Hathaway's portfolio is doing well.

Do investors have a reason to worry?

  • Nothing short of a deep global recession or depression is going to stop the economic engine known as Berkshire Hathaway. Buffett has purposely filled Berkshire's portfolio with companies that deliver brand-name products that express inelastic price and demand histories during economic downturns. The end result is consistent cash flow and market-topping results nearly every year. As long as Buffett is at the helm of Berkshire Hathaway, shareholders have little to fear.

News Corp.
Why are short-sellers avoiding News Corp.?

  • It's not exactly that short-sellers have avoided publishing company News Corp. so much as the rules and regulations that govern what stocks may be shorted have made it impossible to short News Corp. -- until now. News Corp. recently split its entertainment business from its publishing business (the class A non-voting shares you see here), and until July 1 there had been a short-sale trading restriction in place. With that restriction lifted, you're likely to see this short interest rise dramatically when we get the short interest figures for July. 

Do investors have a reason to worry?

  • There's both a good side and a bad side to this split. In the plus column, business spinoffs make it easier for shareholders to understand how a company makes money. Better transparency can go a long way to pushing a stocks' share price higher. Conversely, publishing companies that aren't pushing into new mediums of content distribution are getting crushed. News Corp. still has a lot to prove to investors with regard to its future growth prospects, which could give short-sellers plenty of room to push its share price lower in the interim.

Source: Dieselboii, Flickr.

Nike
Why are short-sellers avoiding Nike?

  • Short-sellers have kept their distance from footwear giant Nike because the company simply keeps stepping over Wall Street's estimates. Just over a week ago it reported better-than-expected fourth-quarter results, which included a 7% increase in operating revenue and a 27% bump in profits. Furthermore, Nike's gross margin expanded 110 basis points over the previous year, as it was able to pass along higher prices to consumers while also benefiting from lower input costs.

Do investors have a reason to worry?

  • If there was any reason for concern, it'd be the ongoing struggles that Nike is experiencing in China. For such a rapidly growing market, Nike is having a hard time getting its inventory under control, to the point that it cautioned shareholders that first-quarter results might be challenging. Over the long run, Nike has proved that its designs know how to reach a broad audience, and its advertising and ambassadors often hit the mark. I wouldn't read too much into any near-term weakness, but I wouldn't be shocked if Nike backed off its highs, either.

Loews
Why are short-sellers avoiding Loews?

  • The primary reason Loews makes a poor short-selling opportunity has to do with the fact that property and casualty insurance companies are money-making machines. When catastrophes do strike, it gives these companies ample reason to raise premiums to a level that will keep them profitable. This means any short-term weakness in Loews will usually be met with a rebound a few quarters down the road.

Do investors have a reason to worry?

  • Actually, Loews shareholders have a lot of reason to be excited that the Federal Reserve is thinking about paring back its monthly bond purchases known as QE3. This monetary easing has been responsible for artificially keeping lending rates low and has constrained the investment income of banks and insurance companies like Loews, which invest quite a chunk of their portfolio in U.S. bonds. As Treasury yields rise, Loews stands ready to see a significant uptick in investment income. Short-sellers could be playing with fire by being short shares of Loews here.

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

  • The primary impetus that has kept short-sellers away from Marsh & McLennan, a company that provides strategic advice to businesses and the government, has been its role in getting insurers ready to deal with the implementation of the Patient Protection and Affordable Care Act, known also as Obamacare. The state health exchanges are by far the most complicated aspect of implementing Obamacare, so with plenty of contract dollars being thrown around, short-sellers aren't keen on standing in front of this bus.

Do investors have a reason to worry?

  • Aside from the PPACA, a lot of Marsh & McLennan's business is dependent on the overall health of the U.S. economy. If you think the U.S. economy is headed for choppy waters, then Marsh & McLennan could run into some temporary troubles. Then again, its advisory services can be useful in both expanding and recessionary environments, making it a company that short-sellers tend to avoid.

Which most-loved S&P 500 company do you think has the greatest risk of heading lower? Share your thoughts in the comments section below.

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Related Tickers

4/16/2014 4:31 PM
^GSPC $1862.31 Up +19.33 +1.05%
S&P 500 INDEX CAPS Rating: No stars
BRK-B $126.00 Up +2.23 +1.80%
Berkshire Hathaway CAPS Rating: *****
L $44.07 Up +0.29 +0.66%
Loews CAPS Rating: ****
MMC $48.31 Up +0.52 +1.09%
Marsh & McLennan CAPS Rating: ****
NKE $73.10 Up +0.82 +1.13%
Nike CAPS Rating: ****

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