The S&P 500's 5 Most Loved Stocks

It's a bird! It's a plane! No, it's the S&P 500 (^GSPC -0.12%), which may actually be soaring higher than most birds and planes for the year.

The iconic broad-based index has risen roughly 24% this year, well more than two times the historical average return of stocks over the past century, on the heels of an improving economic recovery heralded by ongoing record-low interest rates. The unemployment rate, despite a weaker-than-expected October jobs report because of the government shutdown, recently hit a six-year low and the housing industry, which crippled the market five years ago, is now a source of great strength, with home prices increasing in the nation's 20-largest cities by an aggregate of nearly 13%.

As we looked yesterday, though, not every investor is in unison. There are a number of disconcerting factors that could weigh on the S&P 500 moving forward, including the potential for another political standoff over the debt ceiling come February and corporate earnings that are seemingly being driven by cost-cutting and share buybacks rather than genuine organic growth.

Despite this ongoing tug-of-war between optimists and pessimists, there exists 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'm suggesting 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:

Source: S&P Capital IQ.

Berkshire Hathaway
Why are short sellers avoiding Berkshire Hathaway?

• The reason short sellers tend to avoid Berkshire Hathaway may never change: its impeccable diversity. Berkshire Hathaway, when it completes its buyout of NV Energy, will have 58 subsidiaries under its belt from a number of industries including financials, transportation, and retail. The advantage of this incredible diversity is that when one sector is underperforming, there's likely another there to take its place and fill the gap. Warren Buffett also tends to focus on purchasing companies that provide life's basic necessities – and as we've seen, basic necessity products tend to sell themselves.

Do investors have a reason to worry?

• Unless short sellers are expecting a rapid downturn in the stock market, there's probably not a big reason to worry about Berkshire Hathaway. As long as Buffett is at the helm of Berkshire, you can count on well-thought-out investments and a portfolio primed to perform over the very long run. In short, investors here can most likely sleep easy at night.

Wells Fargo
Why are short sellers avoiding Wells Fargo?

• From Warren Buffett's portfolio to one of his top banking investments: Wells Fargo. Wells Fargo finds itself among the S&P 500's least short-sold companies for two reasons. First, it's not a very volatile company (beta of just 0.97) and it pays out a premium dividend for the banking sector of 2.8%. Most short sellers are after the quick buck and companies that are financially weak, which is the opposite of what Wells Fargo's financials would imply. Second, Wells Fargo runs its banking business very conservatively, focusing on deposit and loan growth and staying away from dangerous tools like derivatives investing, which crushed peer JPMorgan Chase last year.

Do investors have a reason to worry?

• Based on Wells Fargo's third-quarter results, I would say investors positioned for the long run are in good shape. Over the near term, Wells Fargo could encounter growth issues with its mortgage banking division, where higher lending rates pushed loan originations down in a big way and coerced it into two rounds of cost-saving layoffs. Aside from its mortgage banking woes, though, deposit growth and credit quality remain impressive relative to its peers. As long as Wells Fargo sticks to its core banking practices, it should deliver among the safest returns in the banking sector.

Source: Debbie Tingzon, Flickr.

Philip Morris International
Why are short sellers avoiding Philip Morris International?

• In addition to product diversity, geographic diversity is an important reason that short sellers tend to avoid high-profile brand-name companies. Philip Morris International, the company behind Marlboro (internationally) and a number of other well-known brands, operates in dozens of countries around the globe. By doing so, it spreads around its chances for growth as well as its legal risks. In the U.S., for example, Altria is plagued by constricting laws on tobacco and has no recourse for selling its products outside the United States. Philip Morris, though, has the ability to sell its products in multiple markets and avoid a tobacco law crackdown in any one particular nation that would drastically impact its top- and bottom-line results.

Do investors have a reason to worry?

• Yet again, if you're positioned for the long run, there probably isn't a lot to worry about with Philip Morris International, although certain near-term headwinds could give short sellers some life. Specifically, in the third quarter Philip Morris delivered revenue growth of just 0.1% while total cigarette shipment volume fell 5.7%. This signifies that Philip Morris' pricing power remains strong, but that the problematic black market sales of cigarettes in the Philippines and other Southeastern Asian markets is going to continue to hurt its results. As long as Philip Morris has pricing power and geographic diversity, along with its 4.2% yield, I don't see much of a reason for short sellers to bet against Philip Morris International.

General Electric
Why are short sellers avoiding General Electric?

• It's a company so nice we can mention it twice! General Electric is not only the Dow's Most Loved Stock, but it also has the fourth-lowest short interest among 500 S&P components. Consider General Electric to be a much smaller version of a Berkshire Hathaway, with its various business segments operating in the finance, health care, energy, and industrial goods sectors. With an improving financial arm and operating in a diverse number of potentially high-growth sectors such as energy and health care, few traders would dare consider betting against GE at these levels.

Do investors have a reason to worry?

• As I said just days ago, investors over the long run should be able to sleep easy at night if they own GE. Based on GE's latest report, the company was able to deliver a record order backlog with Europe becoming a surprising source of growth. With energy and health-care sector growth likely to fuel GE's top-line moving forward, and the company even more focused on keeping its costs in line, I'd suggest there could be more upside yet to be seen in General Electric's share price.

State Street
Why are short sellers avoiding State Street?

• Given that investment advisory services companies are seeing explosive earnings growth, I'm not surprised to see investment services and investment management service provider State Street among the S&P 500's least short-sold companies. State Street, as a direct service provider to mutual funds, investment advisory firms, and insurance companies, is likely to see its bottom line moving steadily higher since cash flows into investment advisory firms have generally been strong. Although State Street's yield of 1.5% isn't much to write home about, it's still enough to demonstrate the stability of its cash flow and keep pessimists on the sidelines.

Do investors have a reason to worry?

• If slow but steady wins the race, then State Street would be a champion. Despite projected growth in the 3%-4% range through 2014, State Street has toppled Wall Street's expectations in each of the past four quarters. In its most recent quarter, profits fell due to a onetime profit tied to the Lehman Brothers bankruptcy last year, but revenue edged higher by 3% as management service fees popped 10%. As long as trading revenue doesn't fall off a cliff – and investment firms have given no indication of this happening -- then State Street should continue to deliver slow-but-steady growth.