The S&P 500's 5 Most Loved Stocks

It's been a bit of an ugly start to the new year for the broad-based S&P 500 (^GSPC -1.35%), especially considering yesterday's absolute shellacking that saw the index lose more than 2%. All said, though, the S&P 500 has been nothing short of a rocket since March 2009.

The basis for this multiyear rally has been an improvement in numerous facets of the market. The credit quality and liquidity of the banking sector has drastically improved and lending rates are still historically low, which is enabling consumers to purchase big ticket items at favorable rates and allowing businesses to expand and boost hiring. The housing industry has also come back with a vengeance. Home prices were up nearly 14% year over year in the latest 20-city Case-Shiller index report, thanks to tight inventory control by homebuilders. Finally, we're seeing a much healthier top-line improvement in the jobs market, with unemployment down from its peak of 10% to just 6.7% as of December.

Yet, as we saw yesterday, some skeptics remain. There are multiple reasons to believe that the true growth of the U.S. economy would be a lot weaker were the Federal Reserve not pumping in monthly stimulus (known as quantitative easing) to keep long-term lending rates low, and were companies not aggressively buying back shares and cutting costs to boost their earnings per share.

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 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?

• Despite being unable to escape the market's downtrend over the past five weeks, short-sellers tend to stand clear of Warren Buffett's Berkshire Hathaway because of its unparalleled diversity. There are a handful of companies that operate in a few industries, but none quite compare to Berkshire Hathaway, which has roughly five dozen subsidiaries from basically every sector under one umbrella. Best of all, Buffett allows these companies to be self-sustaining and rarely sticks his nose into their business, relying instead on the fact that many of his subsidiaries offer basic necessity products to drive top- and bottom-line growth.

Source: White House on Flickr.

Do investors have a reason to worry?

• It's plausible that a downtrend in the overall market could shave value off of Berkshire as traders' sentiment shifts to the negative, but over the long run there's little for investors to fear. Berkshire Hathaway is highly diversified, and its subsidiaries are geared in such a way as to improve book value at a more rapid pace than the S&P 500. In other words, it's all about Berkshire Hathaway bringing sustainable growth to the table.

Loews
Why are short-sellers avoiding Loews?

• As in previous months, the reason pessimists are avoiding Loews is its broad-based diversification -- Loews primarily deals in commercial property and casualty insurance, but it also owns and operates offshore rigs and a chain of 19 hotels. In addition, Loews just doesn't offer the volatility that short-term-minded pessimists are often looking for.

Do investors have a reason to worry?

• Unless there's another storm of the century on the way and short-sellers have a time machine they can use to act on this information, there's probably not a huge reason to be concerned. Property and casualty insurance companies can simply boost their premiums to cover catastrophe losses as they occur. In general, this means so long as an insurer manages its funds conservatively, it'll almost always be a cash flow machine. Short-sellers don't like cash flow machines, plain and simple!

TE Connectivity
Why are short-sellers avoiding TE Connectivity?

• Electronics connectivity company TE Connectivity has kept short-sellers away by doing things the old-fashioned way: stable top and bottom-line growth with a growing dividend. In December, TE Connectivity announced a 16% increase to its quarterly dividend, and since short-sellers are on the hook for that payment they'd just as soon keep their mitts off this company. With a stable outlook for connectivity devices across the board, short-sellers have chosen to keep their distance.

Do investors have a reason to worry?

• After TE Connectivity's ridiculously good first-quarter results two weeks ago, absolutely not! For the quarter, TE Connectivity saw sales increase 6% to $3.33 billion as EPS rose a whopping 26% to $0.82. The company returned $315 million in cash to shareholders through dividends and buybacks. What's more, TE boosted its full-year revenue forecast to $13.8 billion to $14.2 billion on EPS of $3.65 to $3.85, which is $0.05 higher per share than its prior estimates at the midpoint. So long as EPS is handily topping the Street's estimates, investors have little reason to fret.

Agilent Technologies

Source: Agilent Technologies.

Why are short-sellers avoiding Agilent Technologies?

• Shorts-sellers have kept their distance from Agilent Technologies, a company that specializes in measurement instrumentation for the life sciences and chemical sector, primarily because of how hot the genetic analysis sector has been of late. With a heavy focus on life sciences, and genetic analysis expected to play a critical role in improving treatment specialization over the next decade, the thought here is that Agilent's physical and software testing solutions should be critical and only increase in demand.

Do investors have a reason to worry?

• On the one hand, I'm extremely excited at how improved personalized DNA analysis is going to revolutionize research and patient treatment. On the other hand, I'm a realist and understand that tightened government funding and a reasonably slim 4% to 5% growth rate is going to make it tough for Agilent to head much higher despite topping Wall Street's earnings estimates in each of the past three quarters. Agilent really could go either way at the moment.

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

• Pessimists have chosen to keep their distance from tobacco producer Philip Morris because of its geographic diversity, premium dividend, significant pricing power, and the addictive qualities of tobacco, which make lifelong customers out of users. Philip Morris is the epitome of a vice stock, but unlike its U.S.-based brethren, it's able to operate in a number of burgeoning emerging-market countries where smoking laws are considerably less harsh, allowing it to see notable gains.

Do investors have a reason to worry?

• There have certainly been visible reasons for current shareholders to be slightly concerned lately. Cigarette shipment volume has been down amid tougher smoking regulations in developed markets, and the emergence of black market cigarettes in the Philippines has scaled back shipments as well. Then again, prices have been raised to counteract any drop, signaling that Philip Morris' pricing power can abate shipment weakness. Ultimately, Philip Morris is a cash cow with a nearly 5% yield; that's approaching a level where even I'm getting tempted to buy in with my own money. Long story short, I wouldn't be too concerned about Philip Morris' future.