3 S&P 500 Stocks Investors Can't Get Enough Of

The S&P 500 may be drawing the ire of pessimists as it hits all-time highs, but short-sellers know better than to bet against these three most loved stocks.

Jun 5, 2014 at 6:16PM

If it seems as if every time you turn around the S&P 500 (SNPINDEX:^GSPC) is ascending to a fresh all-time high then you're not alone. The broad-based index has hit a number of new highs in 2014 as multiple key economic indicators continue to show signs of improvement.

Perhaps no indicator has pushed the markets higher than the precipitous drop in the unemployment rate. A falling unemployment rate would mean fewer people who want to find work are having trouble getting a job. This would imply that businesses are hiring and consumers are spending (since much of our GDP is dependent on consumer spending). To add, we've also witnessed strong manufacturing growth, steady improvements in housing prices, and a rise in consumer confidence figures which suggests that consumers are feeling better about their short-term and long-term financial outlooks.

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Source: Nathaniel Zumbach, Flickr

Of course, you'll find plenty of skeptics floating around in the crowd as well. The primary reason most skeptics believe the market can't head any higher is a lack of organic corporate earnings growth. We've certainly witnessed an uptick in merger and acquisition activity in recent months, which would signify corporations are willing to take on more risk, but most positive EPS effects have come from cost-cutting efforts and share buybacks rather than traditional revenue growth. Pessimists understand that these methods only work to boost corporate earnings for a finite amount of time, so they're placing their bets in line for the time when the S&P 500 does take a dive off a steep cliff. As FactSet Research notes, there have been 75% more earnings warnings in the second quarter this year compared to the historic average, so perhaps this is a warning to optimists? 

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 three most loved stocks. As we've done in previous months, I suggest we take a closer look at these three 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 three most loved stocks:

Company

Short Interest as a % of Outstanding Shares

Berkshire Hathaway (NYSE:BRK-B)

0%

Loews (NYSE:L)

0.45%

Google (NASDAQ:GOOGL)

0.46%

Source: S&P Capital IQ

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

  • As per the norm, the one stock that optimists can't wait to get their hands on is Warren Buffett's conglomerate, Berkshire Hathaway. The reason short-sellers tend to avoid Berkshire has to do with the company's wide scope of ownership. Buffett's approaching to buying companies is based on the thesis that these companies can operate independent of Berkshire's constant oversight. Often, these are "boring" brand-name businesses that have a niche for growing sales and generating positive cash flow in nearly any economic environment. For investors this simply means that they can expect Berkshire to generally outperform in even the worst economic times.

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Warren Buffett.

Do investors have a reason to worry?

  • Since Berkshire Hathaway's lifeblood still remains the insurance business, unless a series of massive (and I mean massive) catastrophic costs arose, the chances of Berkshire being in serious trouble are almost nonexistent. Berkshire is generally a low-beta company with unparalleled business diversity and a book value that has a strong tendency to increase over time. The overall business model is far from exciting, but after five decades investors have learned better than to bet against Warren Buffett.

Loews
Why are short-sellers avoiding Loews?

  • There are two primary reasons why short-sellers have kept their distance from Loews despite the stock traipsing along near a 52-week low. First, the company is involved in the property and casualty insurance business which is known for strong long-term pricing power and the ability to generate sizable cash flow. Like Berkshire Hathaway, insurers are hit by unexpected catastrophes every now and then, but short-sellers have no viable way of predicting when these will happen. Secondly, Loews isn't a very volatile stock. Over the trailing 52-weeks it's only ranged $7 from high to low, or a little more than 15%. Most short-sellers are looking for volatility and the quick buck, so Loews isn't exactly an ideal short-sale opportunity for pessimists.

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Home destroyed by tornado. Source: Kevin Dooley, Flickr

Do investors have a reason to worry?

  • Of the three S&P 500 stocks listed here that investors can't seem to get enough of, I'd suggest Loews is the most likely to draw worries, merely because its latest quarterly report showed a 75% decline in net income primarily tied to an insurance writedown. Also, with a fairly sizable investment Boardwalk Pipeline Partners and the midstream company cutting its dividend big time earlier this year, it means hundreds of millions of dollars less in annual income for Loews. That's a bit of a pill for shareholders to swallow over the near term, but it's not necessarily a deal-breaker for long-term shareholders. Loews' dividend is a bit unappealing at 0.6%, but consistency from its insurance business is likely going to be enough to keep short-sellers at bay for the time being.
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Source: MoneyBlogNewz, Flickr

Google
Why are short-sellers avoiding Google?

  • As I noted last month, the expectation I had following the split of Google shares into Google Class A (NASDAQ:GOOGL), which has voting power, and Google Class C (NASDAQ:GOOG) which has no voting power, was that short-interest would rise. Short interest following this split was essentially reset and recalculated leading to artificially low figures. What I didn't expect was the short interest on these Class A shares would only rise by 0.02% from the previous month. Shareholders continue to value Google's superior position in search very highly, as well as its rapid growth potential and consistent stream of new gadgetry and innovations. Since unseating Apple as the most valuable brand in the world according to an annual study conducted by Millward Brown last month, what short-seller in their right mind is going to bet against this company? 

Do investors have a reason to worry?

  • Based on the diversity of gadgets being tested by Google and its breadth of understanding its consumers I have a hard time suggesting that short-sellers are going to be right for any significant length of time on Google. If there are any concerns here it's that Google's cost-per-click continues to decline as it moves from PC-based ads into mobile, where margins are a bit lower. The other concern here would be that mobile ads are still in their infancy. This means that mobile market share is still up for grabs and Google could very easily cede some share to its rivals if it tries to do too many other tasks at once. Ultimately, I don't see Google succumbing to these concerns, and short-sellers are likely not going to be happy if they stick around.

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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 Apple, Amazon.com, Berkshire Hathaway, Google (A shares), and Google (C shares). It also recommends Loews. 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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