The S&P 500's 3 Most Loved Stocks

Don't look now, but the broad-based S&P 500 (^GSPC +1.46%) is threatening to make a run at yet another record closing high.

The momentum behind this rally appears to be stronger than Superman. It's more powerful than a group of earnings warnings and can ascend bad economic data in a single bound. Long story short, betting against the S&P 500 has been a losing proposition for quite some time now.

Source: Abir Anwar, Flickr.

The good thing for optimists is that there's genuine reasons to be excited that this rally could continue. The U.S. unemployment rate hit a six-year low last week at just 6.3%, signaling that the jobs market is improving. Housing prices have been steadily increasing by double digits on a year-over-year basis as low lending rates and tight inventory controls by homebuilders drive growth. Even the manufacturing sector has shown signs of life with strong readings over the last couple of months. All told, the U.S. economy is chugging along quite nicely, even with the polar vortex putting a hurt on businesses earlier in the year.

Of course, there's the other column of investors known as skeptics who believe the market is ripe for downside. Their side of the coin also has a mound of evidence, including a labor force participation drop that has artificially lowered the unemployment rate, as well as corporate earnings seemingly influenced more by share buybacks and cost-cutting than genuine organic growth.

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:

Source: S&P Capital IQ.

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

• As in previous months, the basic reason skeptics are avoiding bets against Berkshire Hathaway is because it's rarely ever prudent to bet opposite of Warren Buffett. Berkshire Hathaway is set up as the ultimate conglomerate: it's highly diverse, a number of its businesses supply basic necessities such as electricity, and most components are profitable. Boring businesses might put day traders to sleep, but they're a good formula for long-term outperformance, and Buffett understands this well.

Berkshire Hathaway CEO Warren Buffett.

Do investors have a reason to worry?

• Although Berkshire Hathaway's most recent quarterly results showed a decline in year-over-year profit, I'd hardly call this a reason to worry. The single-biggest drop came from insurance underwriting, which is a long-term profitable, short-term unpredictable business that is often dictated by external factors beyond Berkshire's control. Overall, Berkshire looks poised to continue to grow its book value and deliver steady profits for investors. With roughly five dozen companies under its wing nothing short of a depression looks as if it could knock Berkshire down.

Google
Why are short-sellers avoiding Google?

• Aside from being the most dominant search engine within the U.S., short interest in Google is low primarily because of its recent share-class separation. Class B shares, which carry 10 votes per share and are predominantly held by its founders, aren't publicly traded, while Google's Class A shares (GOOGL +2.53%) and Class C shares (GOOG +2.83%) recently split into two. Class C shares get no voting rights but give Google the opportunity to access new capital via share offerings without diluting the voting rights of management. Class A shareholders get one vote per share.

Google Glass, Source: Loic Le Meur, Wikimedia Commons.

Do investors have a reason to worry?

• Before I even get into the logistics of buying or avoiding Google, let me be clear that I expect short interest to rise, as it's merely low now due to the recent stock separation. But should investors bet against Google? It's a dicey proposition -- Google has nearly $49 billion in net cash and is capable of producing close to $20 billion in operating cash flow per year. On the other hand, Google's cost per click continues to decline as it attempts to transform into a mobile powerhouse. The is a long-term smart move for Google, because that's where investment dollars and consumers are headed, but it could mean challenged margins in the interim. Following its huge run higher I can't say I'm a fan of Google here, but I'm not sure I'd have the gumption to short it, either.

Loews
Why are short-sellers avoiding Loews?

• Similar to Berkshire Hathaway, short-sellers tend to keep their distance from Loews primary because of its diversity. The company has its fingers in the oil and gas industry, insurance, and the hotel sector, which are all generally strong cash flow businesses over the long run. Loews is also a very low volatility stock, and short-sellers are most often short-minded in nature and after the quick buck. With little chance of a big move pessimists merely apportion their funds toward riskier and more volatile investments.

Do investors have a reason to worry?

• I stick by my assessment that Loews is in good shape over the long run, but there certainly could be some near-term hindrances to its share price. In its latest quarterly filing Loews delivered just a 2% increase in revenue but a 75% decline in net income; profits were dragged down by a pending sale of the annuity and pension deposit business at its largest subsidiary, CNA Financial. Compounding its recent struggles, midstream company Boardwalk Pipeline Partners cut its dividend drastically in February, which pushed Loews' $33 million year-ago profit from its subsidiary into an $18 million loss. As I noted, this is a low-volatility, generally high cash flow group of subsidiaries that should help Loews outperform over the long run, but a perfect confluence of struggles in the near term could act as a drag on its share price.