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Berkshire Hathaway Inc. (BRK.A), The AES Corporation (AES): The S&P 500 (.INX)’s 5 Most Loved Stocks

Berkshire Hathaway Inc. (NYSE:BRK.A)

It’s not hard to be optimistic about the prospects for the broad-based S&P 500 (INDEXSP:.INX) with the index closing yesterday at a new all-time high. The jobs picture continues to slowly improve and the majority of companies within the S&P 500 (INDEXSP:.INX) have blown past, or at least met, Wall Street’s earnings expectations thus far in the second-quarter. In a shade over four months, the S&P 500 (INDEXSP:.INX) is up 13% for the year.

While not all investors agree that the market will head higher, short-sellers have certainly kept their distance from a select few S&P 500 (INDEXSP:.INX) components. Today, just as we did last month, I intend to look at the five least short-sold S&P 500 (INDEXSP:.INX) components and decide whether or not current shareholders have any reason to worry.

Company Short Interest as a % of Shares Outstanding
Berkshire Hathaway 0.00%
Precision Castparts
Loews 0.54%
Marsh & McLennan 0.55%

Source: S&P Capital IQ.

Berkshire Hathaway Inc. (NYSE:BRK.A)

Why are short-sellers avoiding Berkshire Hathaway Inc. (NYSE:BRK.A)?

  • Just as we saw last month, there’s really not a justifiable reason to bet against Berkshire Hathaway Inc. (NYSE:BRK.A) unless you believe there’s going to be a major deterioration in the overall economy. Even then, it wouldn’t make a lot of sense to bet against Berkshire Hathaway Inc. (NYSE:BRK.A), given that its 57 owned businesses cover a variety of sectors which would spread out its potential risk.

Do investors have a reason to worry?

  • As long as Warren Buffett is involved in the decision-making process shareholders can sit back and relax. Buffett and his trusted assistant Charlie Munger love boring companies that simply make money. Berkshire’s portfolio is filled with well-diversified, established companies, and Berkshire Hathaway Inc. (NYSE:BRK.A) has been rewarding shareholders with share repurchases of its own stock thanks to an abundance of cash on hand. This certainly isn’t a formula any short-seller would dare mess with.
The AES Corporation (NYSE:AES)

Why are short-sellers avoiding The AES Corporation (NYSE:AES)?

  • It appears the primary reason for short-sellers to avoid The AES Corporation (NYSE:AES), a global power company, is the fact that it reaffirmed its full-year EPS forecast in April. Although the company’s first-quarter EPS guidance would signal an EPS reduction from the year-ago period, the simple fact that it stuck to its original guidance and operates in many rapidly growing emerging markets has short-sellers on the run.

Do investors have a reason to worry?

  • This is a case where I’m having a difficult time understanding why the short interest is so low. The AES Corporation (NYSE:AES) certainly isn’t expensive at just 11 times this year’s earnings, but the company has struggled in recent years with unfavorable currency translations, weak foreign energy demand, and a mountain of debt that currently totals $21.4 billion. Enough uncertainty exists here that I think shareholders should remain on their toes.
Precision Castparts Corp. (NYSE:PCP)

Why are short-sellers avoiding Precision Castparts?

  • Precision Castparts Corp. (NYSE:PCP), a manufacturer of metal components and products for the aerospace and energy industries, has benefited from a rebounding economy. An improving jobs outlook and stable costs would signal a good potential for growth in the metal fabrication business. With a price-per-share of nearly $190 and a revenue growth rate forecast to average about 20% over the next two years, short-sellers have all the reasons they need to pass.

Do investors have a reason to worry?

  • Although I agree that Precision Castparts Corp. (NYSE:PCP)’ revenue growth is phenomenal and its high share price can be quite the deterrent to attractive short-sellers, I’m a bit concerned that the company has missed Wall Street’s EPS projections in three straight quarters. Furthermore, the company’s annual dividend of $0.12 is a slap in the face to income-seeking investors (a yield of just 0.1%). Unless the company can meet or beat EPS estimates next quarter, I’d look for short interest to rise as I fail to see many long-term catalysts.

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