The S&P 500's 5 Most Loved Stocks

Don't let the latest two-day swoon fool you: The broad-based S&P 500 has been a practically unstoppable force since the recession's lows. In fact, as of Wednesday last week it was within 100 points of having tripled from its 2009 low, which signifies ongoing confidence in the U.S. economic recovery from investors.

Source: Geralt, Pixabay

A number of factors can be credited for this huge wealth-building run by the S&P 500, but none may be more crucial than the Federal Reserve, whose economic stimulus plan known as QE3 provided the impetus to keep rates near historic lows. These record-low rates led to a rebound in the housing sector and gave businesses the ability to take on new debt and refinance old debt at attractive rates. This extra financing has been one of the reasons the unemployment rate is down: Business expansion has led to a new wave of hiring.

Of course, skeptics like myself still abound.

The other case to be made for QE3 is that a vast majority of investors, even those who claim to be savvy investors, don't understand basic investing principles, such as the relationship between bond prices and bond yields -- and that's really scary. In other words, once the Fed removes QE3 completely (it has already begun winding QE3 down), there will be fewer and fewer long-term Treasury purchases, which is likely to cause a drop in bond prices and a rise in yields. While that's great news for U.S. banks and insurers who invest in fixed-income securities, it's terrible news for companies looking to take on debt and consumers who want to buy a home. QE3 may have brought the U.S. economy out of the recession for good, but it may also be what sends the country back into recession.

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 set 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%

Loews (NYSE: L  )

0.55%

TE Connectivity (NYSE: TEL  )

0.61%

Delphi Automotive (NYSE: DLPH  )

0.63%

Wells Fargo (NYSE: WFC  )

0.67%

Source: S&P Capital IQ.

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

  • Here's a shock: Berkshire Hathaway is yet again the S&P 500's least short-sold stock! As in previous months, Warren Buffett's knack for purchasing a diverse base of "boring" companies that simply make money is keeping short-sellers at bay. Even if the market drops, pessimists are much more likely to pounce on individual, nondiversified companies than a nearly five-dozen-company conglomerate like Berkshire Hathaway.

Do investors have a reason to worry?

  • So long as your time horizon is longer than a week or a month, there's rarely a reason to worry about Berkshire Hathaway's performance. Over the past five decades, Buffett has outperformed the S&P 500 in terms of book value growth about 80% of the time, and those are figures I wouldn't bet against. I've said it before, and I'll say it again: So long as Warren Buffett is at the helm, investors would be wise to listen to Buffett rather than bet against him.

Source: U.S. Department of Energy, Wikimedia Commons

Loews
Why are short-sellers avoiding Loews?

  • Diversity is the name of the game, and Loews has two cash-cow businesses in property and casualty insurance and oil-and-gas drilling and midstream operations. Property and casualty insurance isn't an exciting business by any means -- and it's quite unpredictable -- but Loews maintains strong premium pricing power that's needed to front-run the next catastrophe. In addition, Loews also sports enormous energy assets, allowing the company to take advantage of commodity price jumps and the business of transporting energy assets through more than 14,000 miles of interconnected pipeline. Short-sellers rarely bet against cash-flow-friendly businesses like Loews.

Do investors have a reason to worry?

  • It's difficult to disrupt a diversified business like Loews. However, the company's exposure to Boardwalk Pipeline Partners and its disastrous share-price drop after it slashed its dividend by more than 80% in the latest quarter could take quite a bite out of the company's 2014 EPS. Last year Loews earned $293 million in income from Boardwalk, and that will almost assuredly be much lower in 2014 thanks to the dividend cut. Still, Loews 10% drop since the fall may already account for Boardwalk's swoon as its insurance business is operating smoothly and its forward P/E of 11 isn't particularly high. Short-sellers may be able to scrape some crumbs off the table here, but it's not the type of company I'd recommend betting against.

TE Connectivity
Why are short-sellers avoiding TE Connectivity?

  • TE Connectivity is a lot like Berkshire Hathaway in that the reason short-sellers have kept their distance hasn't changed much in many months. TE Connectivity is a maker of electronic connectivity devices for a number of industries, and the growth in these devices is steady, leading to upped EPS and revenue expectations for the full year and the company announcing a 16% increase to its dividend recently. Added up, growing revenue and EPS, compounded with higher dividends, is a formula that'll keep short-sellers at bay. 

Do investors have a reason to worry?

  • TE Connectivity is a model of consistency, and I doubt it will run into much trouble with its upcoming quarterly report. As everyday things in our lives become more interconnected, we'll probably only see the demand for TE Connectivity's products head higher. Slow and steady usually wins the race, and that's enough reason for pessimists to keep their distance from this stock.

Aluminum cable, Source: Delphi Automotive

Delphi Automotive
Why are short-sellers avoiding Delphi Automotive?

  • Automakers aren't the only ones benefiting from a surge in auto sales. Some of the nation's largest component-suppliers are seeing big rewards, such as Delphi Automotive. For 2013, revenue rose 6% to $16.5 billion as adjusted operating income jumped 10% and cash from operations, which I believe is the most critical factor for Delphi in terms of R&D and expansion, rose 18% to $1.8 billion. As long as auto sales remain strong, pessimists have had little reason to bet against Delphi.

Do investors have a reason to worry?

  • I have to admit that I'm surprised Delphi remains among the lowest short-sold stocks in the S&P 500, even with strong auto sales, given that it only reemerged from bankruptcy protection four-and-a-half years ago. Note, that doesn't mean I'd consider betting against it, but you'd think there would be more pessimists. The majority of this year's weak start can be blamed on frigid East Coast weather, but it appears that auto dealers in the U.S. are picking up in March and April where they left off last year. For Delphi that's a good sign, and one that should keep short-sellers on the sidelines.

Wells Fargo
Why are short-sellers avoiding Wells Fargo?

  • Here's irony for you: Not only is Berkshire Hathaway the least short-sold stock in the S&P 500, but banking giant Wells Fargo, Buffett's largest portfolio holding, rounds out the top five least short-sold stocks. It proves that pessimists don't bet against Buffett often and that Wells Fargo's conservative banking approach -- avoiding derivatives trading and focusing on deposit and loan growth -- is the right formula for excelling in nearly any economic environment. With less of a chance of "imploding" relative to its peers, pessimists have tended to keep their distance from Wells Fargo.

Do investors have a reason to worry?

  • Practically everything is working in Wells Fargo's favor, so I don't expect shareholders to lose sleep at night. With the exception of reduced mortgage loans, Wells Fargo is seeing a steady reduction in delinquencies, delivered a record annual profit in 2013, sports a return on assets that's head and shoulders above many of its peers, and could be on the precipice of reaping huge rewards from higher interest rates if QE3 does wind up sending lending rates higher. Unless we dip back into a moderate or severe recession, there's no need to be concerned about Wells Fargo, in my opinion.

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  • Report this Comment On April 08, 2014, at 11:30 PM, PEStudent wrote:

    "...Loews has two cash-cow businesses in property and casualty insurance and oil-and-gas drilling and midstream operations..."

    If that's the case, why does it so frequently have negative quarterly eps, has increased it's long-term debt by a factor of 8 in the past decade, and has seen it's Return on Equity drop from a healthy 15 to an anemic 3.1% that makes one wonder if it's able to put new earnings to work.

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