The S&P 500's 5 Most Loved Stocks

The S&P 500 (SNPINDEX: ^GSPC  ) may be down in nine of the past 11 days, but you'd hardly know it with the S&P 500 up close to 150% since its March 2009 lows.

It isn't hard to understand why investors have been so optimistic about the economy in recent months. The unemployment rate is at its lowest point since 2008, signaling that people who want to work are beginning to find work, and the housing industry has seen an incredible rebound in home prices across a broad range of markets as lending rates have stayed near historic lows and allowed both consumers and businesses to refinance debt at favorable rates.

Certainly, not everyone agrees as we looked at five S&P 500 companies just yesterday that have attracted heavy short interest from skeptics. The ongoing government shutdown and the uncertainties of the upcoming debt ceiling debates have clouded the market's near-term outlook.

However, throughout the S&P 500's ups and downs, there have stood five stocks that short sellers know better than to bet against. We'll call them the S&P 500's five most loved stocks. As we've done in previous months, I suggest taking a closer look at each one to determine what characteristics, if any, they share because stocks that carry few short-sold shares could be more inclined to head higher.

Here are the S&P 500's five most loved stocks:

Company

Short Interest as a % of Outstanding Shares

Berkshire Hathaway (NYSE: BRK-B  )

0.00%

Ametek (NYSE: AME  )

0.33%

TE Connectivity

0.52%

Tyco International (NYSE: TYC  )

0.53%

Wal-Mart (NYSE: WMT  )

0.59%

Source: S&P Capital IQ.

Berkshire Hathaway
Why are short sellers avoiding Berkshire Hathaway?

  • The month may change but the ongoing reason why short sellers tend to shy away from Warren Buffett's baby doesn't: unparalleled diversity. Berkshire Hathaway, with the purchase of Nevada's NV Energy, combines 58 subsidiaries from varying industries all under one holding company, which makes the likelihood of a protracted downtrend very doubtful. When one industry struggles, there's almost always another to step up and fill the void.

Do investors have a reason to worry?

  • Nothing short of a depression should cause a Berkshire Hathaway shareholder even the slightest bit of concern. The company is so well-diversified, and Buffett so masterful at picking out basic needs companies that can essentially run themselves based on brand awareness alone, that very little tends to disrupt its stock. It's certainly not a company short sellers have had much success with throughout the years.

Ametek
Why are short sellers avoiding Ametek?

  • Not a name we often hear much since it just joined the S&P 500 but two weeks ago, Ametek is a global manufacturer of electronic instrumentation and electrochemical devices. It's made a name for itself in the tech sector by being one of the few companies that have consistently produced profits throughout much of the past decade and steadily moved their dividends higher. Specifically, with little competition in electrochemical devices, it's able to reap the rewards of higher margins, which translate into healthy profits and a fairly consistent earnings history.

Do investors have a reason to worry?

  • Based on Ametek's second-quarter earnings report, I don't think short sellers would want to mess with this company. According to the press release, it set all-time records for "operating income, operating margins, net income and diluted earnings per share... [and] exceeded $1.1 billion in backlog [which] was an all-time high." Ametek's niche services and growing margins should definitely give short sellers reason for pause moving forward.

TE Connectivity
Why are short sellers avoiding TE Connectivity?

  • The biggest reason TE Connectivity, a manufacturer of electronic components that control the flow of power in various electronic equipment, has run higher over the past year is the surge in telecommunications network spending. From the enterprise to consumer segment investment, dollars are flowing down the pipeline and into component suppliers like TE Connectivity, which are benefiting in a big way.

Do investors have a reason to worry?

  • I'd say yes and no. On a forward-looking basis, TE Connectivity is fairly inexpensive at just 14 times forward earnings and does have a surge in telecommunications spending pushing its shares higher. Then again, revenue growth is flat this year and only forecast to be about 6% next year , so shares might already be reflecting that networking growth as of its latest run higher. While I'm not certain TE Connectivity shares give back much ground, I'm a bit concerned that its run higher could be near its end.

Tyco International
Why are short sellers avoiding Tyco International?

  • What are the odds that we get two Tyco companies in the top four? TE Connectivity was known as Tyco Electronics before it changed its name. The driving force here that's kept short sellers at bay has been Tyco's spinoffs, which have led to an easier to understand and more transparent business model. Investors like to buy companies they can understand, and the new Tyco International, which is a global fire and security company, is pretty straight-forward.

Do investors have a reason to worry?

  • Another big part of Tyco International's rebound has been due to a cyclical upturn in fire and security sales as new-home sales have picked up. However, we know this can't last forever given that rising lending rates caused a dramatic fall in mortgage loan originations. We have to assume that at some point soon Tyco's growth may slow as the housing sector cools off, which could have some negative implications for its share price. Like TE Connectivity, the downside could be limited, but the upside appears limited as well.

Wal-Mart
Why are short sellers avoiding Wal-Mart?

  • Simply put, short sellers tend to avoid betting against an established industry disruptor. In this case, Wal-Mart is the king of all retail in the United States. Its geographical reach, product assortment, and ability to undercut every local mom-and-pop store on price give it an edge that few companies are really able to compete with. Another factor to consider here is cash flow generation. In just the past five years, Wal-Mart has generated $60 billion in free cash flow. Would you seriously consider betting against that?

Do investors have a reason to worry?

  • On one hand, Wal-Mart is about as stable a stock as they come, with a minuscule beta of just 0.28. In other words, it's only about 28% as volatile as the S&P 500, which makes it, for lack of a better word, a boring investment for short sellers. Then again, even Wal-Mart is finding that IRS furloughs hurt its sales come tax refund time and could wind up struggling if the government shutdown continues for too long. Not to sound too much like a broken record, but the upside and downside appear to be really limited at the moment.

What short sellers understand most of all
The best investing approach, and the top way to avoid short sellers, is to choose great companies and stick with them for the long term. The Motley Fool's free report "
3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2668197, ~/Articles/ArticleHandler.aspx, 4/24/2014 1:01:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement