The S&P 500's 5 Most Loved Stocks

Skeptics may abound with the S&P 500 at a fresh all-time high, but they'd better think twice about betting against these five most loved stocks.

Mar 5, 2014 at 5:16PM

If you recall, at this time last month we were talking about what a rocky start the broad-based S&P 500 (SNPINDEX:^GSPC) had to the new year. The scaling-back of quantitative easing by the Federal Reserve marked a tangible plateau to the amount of free money that would be pumped into the economy on a monthly basis, and housing data had begun to weaken as interest rates inched slightly higher and consumers simply stopped buying as many homes.

But that was last month.

Wall Street Bull Close

Yesterday, the S&P vaulted to a fresh all-time high following easing tensions in Crimea between Russia and Ukraine. In addition to the geopolitical relief, certain economic indicators are walking a fine line between growth and stagnation that could put the Fed's stimulus pullback on hold at the moment. Gross domestic product growth, for example, came in at 2.4% in the second estimate for the fourth quarter. That's down considerably from the initial estimate of 3.2% and well below third-quarter GDP growth of 4.1%. On the flip side, 2.4% is still solid enough to expand the bottom line of some of America's top companies.

Of course, not everyone agrees that the U.S. economy is in great shape. As I've highlighted previously, a weaker labor-participation rate and beefed-up share buybacks, coupled with reduced costs, have made the overall economy and stocks appear better than things really might be.

Despite this ongoing tug-of-war between optimists and pessimists, there is a select group of companies within the S&P 500 that few investors would dare bet against. I like to refer to these companies as the S&P 500's five most loved stocks. As we've done in previous months, I suggest we take a closer look at these five S&P 500 components 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%

Delphi Automotive (NYSE:DLPH)

0.58%

TE Connectivity (NYSE:TEL)

0.58%

United Technologies (NYSE:UTX)

0.64%

PepsiCo. (NYSE:PEP)

0.64%

Source: S&P Capital IQ.

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

  • Betting against Warren Buffett simply isn't a great idea might be tops on the list of why pessimists tend to keep their distance from Berkshire Hathaway. Diversity is another big reason. Berkshire is a massive global holding company with nearly five dozen subsidiaries under its roof from a number of industries. If one sector is down, there's a good chance that another portion of its holdings is doing well. In addition, a number of Berkshire subsidiaries are suppliers of basic necessities -- whether it be energy or consumer goods products -- providing relatively consistent cash flow for investors.

Do investors have a reason to worry?

  • Not if you saw Berkshire's latest earnings report! Berkshire, just days ago, reported a record year in terms of profit, with full-year earnings up 31% to $19.48 billion and Berkshire's book value, which is the true measure of Buffett's success in his own eyes, up 18%. Buffett hasn't been shy about these strong results and the urge to continue looking for accretive acquisitions. Buffett has proven time and again to be an investing mastermind, and it's probably best not to bet against him over the long run.
Delphi Eea

Source: Delphi Automotive.

Delphi Automotive
Why are short-sellers avoiding Delphi Automotive?

  • Since reemerging from bankruptcy in October 2009, Delphi is a completely changed company -- and it has a strong rebound in the auto industry to thank for that. The components, electrical, and powertrain supplier has benefited from a surge in vehicle sales back to 15.6 million units in 2013, a high-water mark since 2007. In addition to better auto sales, Delphi has seen credit rating upgrades as the company has worked to lessen its debt burden.It has also worked in some new partnerships, including the announcement of a joint development of high pressure direct natural gas injectors with Westport Innovations earlier this week.

Do investors have a reason to worry?

  • Unless we witness a serious degradation in domestic auto sales, I believe there's simply too much growth momentum behind Delphi to consider betting against it. Delphi is benefiting from consumers' desire to upgrade to more fuel-efficient vehicles, as well as historically low lending rates that make purchasing a car relatively affordable. Even after its monstrous run higher, it still trades at less than 12 times forward earnings which appears more than reasonable. I'd contend that Delphi shareholders are still in great shape.

TE Connectivity
Why are short-sellers avoiding TE Connectivity?

  • One easy reason for short-sellers to keep their distance from TE Connectivity has been the rapidly growing need for electronic connectivity devices throughout a number of industries. TE Connectivity reported 8% order growth in the first quarter as organic growth improved for the third consecutive quarter. To boot, TE Connectivity also announced a 16% increase to its dividend which only further signals to investors that its cash flow is secure and its outlook is steady. Short-sellers tend not to go after secure and steady companies.

Do investors have a reason to worry?

  • I have at times questioned TE Connectivity's growth rate, noting that it could slow and abate its recent upside move, but following the company's first-quarter earnings results in January that opinion is a distant memory. TE Connectivity boosted the low and high end of its guidance by $0.05 and lifted its revenue forecast as well. It's pretty apparent how important electronic connectivity is becoming, and this is one company I'd suggest pessimists not place their bets against.

United Technologies
Why are short-sellers avoiding United Technologies?

  • United Technologies offers many of the same perks to shareholders as Berkshire Hathaway in that it targets a number of different industries with its subsidiaries. This means weakness in one segment may give way to strength in another and provide a good hedge in recessionary or contracting markets. Also, United Technologies is paying out a respectable 2% yield, and short-sellers are known for avoiding companies that generate a lot of cash flow and pay out dividends to shareholders since they themselves would be on the hook for that payout.

Do investors have a reason to worry?

  • Perhaps the only concern that investors should really have here is U.S. government spending. Washington isn't the only source of revenue for United Technologies, but it's enough that a government shutdown or fear of additional budget reductions could cut into its full-year outlook. Luckily, we're not staring down any shutdowns or huge defense and aerospace cuts anytime soon, so it's probably smooth sailing for this conglomerate moving forward.
Pepsi On Shelf

PepsiCo
Why are short-sellers avoiding PepsiCo?

  • Last, but not least, we have PepsiCo which short-sellers tend to avoid because the carbonated and still beverage market is generally fairly inelastic and resilient to economic upturns and downturns. What this means for existing shareholders is relatively steady cash flow in the domestic market, along with a greater potential for volume and pricing growth in overseas emerging markets. While Pepsi has often played second fiddle to Coca-Cola in recent years, it is still managing to kick out a 2.8% yield to current shareholders, and generated $6.9 billion in free cash flow in fiscal 2013.

Do investors have a reason to worry?

  • This one's a bit tougher than the previous four even though it doesn't make much sense to bet against a company such as Pepsi that has a strong brand name and steady cash flow, along with a premium dividend. Then again, Pepsi is underperforming its soft-drink brethren and is only scheduled to grow by 1% this year, which isn't very becoming of a company valued at nearly 17 times forward earnings. My gut tells me not to bet against PepsiCo because of its brand power, but my brain also believes little upside currently exists in its share price due to its recent underperformance.

These stocks may be loved, but they're likely no match in growth potential for our top stock in 2014
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Sean Williams has no material interest in any 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 Berkshire Hathaway, Coca-Cola, PepsiCo, and Westport Innovations and has the following options: long January 2016 $37 calls on Coca-Cola and long January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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