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The S&P 500's 5 Most Loved Stocks

By Sean Williams - Apr 8, 2013 at 4:45PM

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Short-sellers are keeping their distance from these five S&P 500 components, but not all five are as healthy as their short interest would imply.

The first quarter was a truly memorable quarter from an investors' standpoint. In a matter of four years, we went from the lost decade to an all-time record closing high for the broad-based S&P 500 (^GSPC 0.01%). The most intriguing aspect of the 10% rally this quarter was that nearly every sector participated in moving the index higher.

As we saw on Friday, not all investors supported the markets' broad rally, as is evidenced by the extreme short interest in the five "most hated" stocks within the S&P 500 that I highlighted on Friday. Today, I thought it worthwhile to examine the five most loved (i.e., least short-sold) stocks within the S&P 500.

Company

Short Interest as a % of Shares Outstanding

Berkshire Hathaway

(BRK.A 0.10%)

0.04%

Beam (BEAM.DL)

0.57%

Coventry Health Care

0.59%

Fidelity National Information Services (FIS 2.58%)

0.59%

Brown-Forman (BF.B 1.60%)

0.64%

Source: S&P Capital IQ.

Just as we did with the S&P 500's most hated stocks, I propose we examine the reasoning behind why short-sellers might be avoiding these five companies and take a closer look at whether current investors have any reasons to worry.

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

  • It's easy to see why short-sellers avoid Berkshire Hathaway's class "A" shares like the plague: It's a mixture of price and diversification. At more than $156,000 per share, it can be incredibly painful from a margin perspective for short-sellers to get their hands on Berkshire's class "A" shares. Also, Berkshire Hathaway is a conglomerate, holding 56 separate subsidiaries across a myriad of sectors. That type of diversification can usually only be bought with a mutual fund or ETF.

Do investors have a reason to worry?

  • With Warren Buffett at the helm and making the decisions, shareholders have little, if anything, to worry about. Hiccups in Berkshire's insurance and reinsurance industry have hampered results over the previous two years, but other industries have helped pick up the slack. With a price that will keep short-sellers from gaining a big position in the company, I'd call Berkshire Hathaway's "A" shares a safe investment over the long run.

Beam
Why are short-sellers avoiding Beam?

  • Distilled-spirits maker Beam is another company that I feel naturally belongs on this list of least-shorted stocks. Regardless of the condition of the economy, alcohol producers tend to perform well and rarely have to resort to price reductions in order to drive sales. Beam has delivered six straight quarterly earnings beats in a row, including its fourth-quarter results that included an 11% sales increase and a 43% boost in net income.

Do investors have a reason to worry?

  • From a valuation perspective, there's perhaps a little cause for concern: 21 times forward earnings is a steep price to pay for sales growth of 6% to 7%. However, U.S. spirits volume grew 3% in 2012, according to a report by The Wall Street Journal, which is stronger than many had expected. Considering that distilled-liquor prices are relatively inelastic and that Beam is experiencing strong growth in its North American market, I wouldn't expect a short-side bet to return much, if anything.

Coventry Health Care
Why are short-sellers avoiding Coventry Health Care?

  • Perhaps this is the most blatant reason for short-sellers to avoid a stock: Coventry Health Care agreed to be purchased by Aetna in August for $5.7 billion in a 65% cash, 35% stock deal. Five weeks after the buyout was announced, shareholders sued Coventry, saying the deal drastically undervalued the company while enriching top executives. Any short-sellers here would be making a cross-fingered bet that health insurer Aetna's share price declines significantly or that the deal somehow falls apart.

Do investors have a reason to worry?

  • As much as I disliked Coventry's valuation before the deal was announced, I don't see anything immediate for shareholders to worry about. The deal remains on track to close in the second or third quarter of this year as the companies had previously announced. And with shareholder approval granted in November, there's no indication that the deal is about to fall apart. Short-sellers don't have much, if anything, to gain by betting against Coventry Health Care.

Fidelity National Information Services
Why are short-sellers avoiding Fidelity National Information Services?

  • Pessimists have predominantly kept their distance from Fidelity National, or FIS, because of the expectation of strong growth in payment processing and financial-service core processing software over the next decade. FIS' growth isn't off the scale -- revenue is forecast to rise by 4% to 6% in the upcoming year -- but a recently boosted dividend, as well as the strong payment-processing performance of Visa and MasterCard, has kept short-sellers at bay.

Do investors have a reason to worry?

  • There could be a reason to tread lightly around FIS, given that its most recent quarterly EPS missed by $0.01 and its payment-processing revenue dipped 1%. I'm worried that weakness in international markets could stymie its near-term payment-processing growth, which would expose FIS' trailing P/E of 25 to the ire of skeptical short-sellers. Over the long run, however, I maintain a positive outlook on FIS and the payment-processing sector.

Brown-Forman
Why are short-sellers avoiding Brown-Forman?

  • I think we're beginning to notice a trend here: Short-sellers don't want anything to do with alcohol distillers! Brown-Forman, the maker of Jack Daniels and Southern Comfort, will avoid a lot of short interest for many of the same reasons as Beam -- the price inelasticity of its products, relatively steady product demand, etc. It also doesn't hurt that Brown-Forman raised its dividend by 9% in November, marking the 29th consecutive year it has boosted its annual payout. 

Do investors have a reason to worry?

  • Despite having more recognizable brands in its liquor portfolio than Beam, I'd say Brown-Forman could be the most shortable stock on this beloved list. Brown-Forman is valued at 23 times forward earnings yet will grow sales by just 5% this year and 7% next year. Whiskey sales have remained strong, but I'd keep a cautious eye on Brown-Forman's growing expenses and aggressive investments into its business. A 1.4% yield just doesn't seem like enough to get excited about here.

What S&P 500 darling would you most like to call your own? Share your thoughts in the comments section below.

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Stocks Mentioned

S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,901.36 (0.01%) $0.57
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$456,500.00 (0.10%) $468.99
Brown-Forman Corporation Stock Quote
Brown-Forman Corporation
BF.B
$62.91 (1.60%) $0.99
Beam Suntory Inc. Stock Quote
Beam Suntory Inc.
BEAM.DL
Fidelity National Information Services, Inc. Stock Quote
Fidelity National Information Services, Inc.
FIS
$99.68 (2.58%) $2.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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