Have Investors Fallen in Love With These 3 S&P 500 Stocks?

Another day, another all-time high for the S&P 500 (^GSPC -0.22%), which is continuing its march toward the psychological 2,000 mark regardless of whether our economic data releases are good or bad. With roughly half of all stocks in the Motley Fool CAPS database sitting at or within just 10% of a 52-week high the breadth of this rally has encompassed nearly all sectors and stock sizes, from large cap all the way down to microcaps.

Source; TheTaxHaven, Flickr

Yet the basis for this rally isn't just "pin the tail on the next skyrocketing IPO" -- although that would make for a really popular all-ages game, now that I think about it! There are tangible positives driving the S&P 500 higher, including a significant drop in the U.S. unemployment rate since the recession, improvements in consumer spending, a stabilization in home sales coupled with a rise in home prices, and with the exception of the first quarter, which was marred by the polar vortex, a return to modest U.S. GDP growth.

But as we saw yesterday when we examined a handful of the Nasdaq's least-liked stocks, not all investors can be lumped into the optimists camp. Skeptics would suggest, among other things, that corporations are using share repurchases and their ability to cut costs in order to give the perception that EPS is growing when, in actuality, top-line growth is anemic at best. There's also concern that the end of QE3 and an eventual rise in the federal funds rate (and thus interest rates) could cause economic growth to grind to a halt.

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, because investors can't seem to get enough of them. 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:

Source: S&P Capital IQ

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

• There's a pretty good reason why short-sellers keep their nose clean of Berkshire Hathaway: No one is foolish enough to bet against Warren Buffett. While Buffett and his company Berkshire Hathaway aren't infallible, he has managed to lead his conglomerate to a book value growth outperformance of the S&P 500 in all but nine of the past 50 years! Buffett has stacked Berkshire Hathaway with "boring" companies that essentially run themselves with little oversight. Furthermore, he's done so by compiling five dozen companies from different sectors in order to hedge the company's performance during recessions. There's just not a compelling reason to bet against Berkshire Hathaway.

Warren Buffett at annual Berkshire Hathaway shareholders meeting.

Do investors have a reason to worry?

• Among the thousands of stocks you can choose from, there are few which offer as much of a downside safety net as Berkshire Hathaway. That doesn't mean shares couldn't help lower; but it does mean that its business diversity and the incredible cash flow generated by the sum of its parts makes it a very unwelcome company to bet against. As long as Buffett and Co. continue to add one or two new acquisitions a year there's really nothing to stand in the way of Berkshire Hathaway.

Loews
Why are short-sellers avoiding Loews?

• To sort of echo the same theme but to a lesser extent, Loews has remained off the radar of short-sellers because of its diverse business model. Although, like Berkshire, Loews operates primarily in the cash-flow rich insurance business, it also operates a chain of hotels as well owns interests in offshore oil and gas operations. Having its fingers in so many different sectors gives Loews the opportunity to cash in even when economic growth stalls. In addition, Loews is a low volatility stock, and short-sellers tend to prefer a quick bang for their buck. In other words, Loews is simply too boring to be trifled with.

Do investors have a reason to worry?

• Of the three stocks listed above Loews is likely the shakiest in terms of current fundamentals, but its long-term outlook continues to remain intact. Loews has sizable investment stakes in a handful of other companies, one of which is Boardwalk Pipeline Partners (BWP). Boardwalk's dividend had been one of the many factors fueling Loews' profitability. But in February, Boardwalk and majority holder Loews chose to slash its dividend by around 80% due to a weaker outlook in the natural gas market. This shaved a sizable chunk off Loews' profit forecast. Thankfully, its hotel operations and insurance business have been performing well, delivering more than enough cash flow to keep investors calm. In the near term it's possible Loews could struggle a bit, but over the long run its diversity should chase away most pessimists.

Google
Why are short-sellers avoiding Google?

• Consumers love the Internet and they love high-tech gadgets. If you put the two ideas together you have Google, one of the most dominant Internet forces imaginable. Short-sellers generally want nothing to do with Google because of its incredible cash balance (close to $49 billion in net cash), its dominance in the PC ad scene combined with its leadership as a search engine, and its ability to innovate in new areas (i.e., Google Glass and driverless cars). Google might appear to be a mature company, but it still offers years of double-digit growth potential making it a company that pessimists often avoid.

Do investors have a reason to worry?

• There aren't too many concerns when it comes to Google, but I can think of two outside chances where Google fails to succeed. First, mobile ads are relatively new to everyone and even Google is still figuring out what works and what doesn't. This means there's market share up for grabs and there's no guarantee that Google will win that share amid a crowded field of advertising platforms. Second, Google cost-per-click continues to decline, but this also isn't anything new. As Google has shifted its future interests toward mobile from PCs it's dealt with lower margins from mobile ads. In the long run this is a smarter move for Google. While I'd personally suggest that the upside in Google is muted at the moment, I wouldn't dare consider betting against this Internet powerhouse.