Although the financial world is often seen as serious and analytical, short selling introduces an element of excitement and complexity to market dynamics. Short selling is a strategy where investors borrow shares of a stock, anticipating that the market price will drop by the time they need to purchase the shares to return them. While many short sellers have scaled back since the meme stock frenzy began, the strategy of betting against stocks remains in practice. Short sellers saw strong gains in the second quarter of this year, successfully betting against stocks despite the broader market's upward trend. Data from S3 Partners LLC showed they earned $10 billion in paper profits during the quarter. These gains, driven by sectors like industrials, healthcare, and financials, helped offset a $15.7 billion mark-to-market loss in the technology sector.
The fact that short sellers were able to profit while the market was rising suggests that investors are concentrating on a handful of large-cap tech stocks amid an uncertain economic environment, leaving vulnerabilities in other sectors. During the quarter ending June 28, the broader market gained roughly 4%. Meanwhile, the tech-focused Nasdaq 100 Index saw a 7.8% gain over the same period.
It's clear that short sellers capitalize on overlooked or troubled areas of the market. Last year, the turmoil in regional banks attracted short sellers, who stirred controversy by examining lenders' balance sheets for vulnerabilities linked to rising interest rates and betting against their stocks. In 2023, while the broader market rallied, this sector became a key area of success for these traders. The volatility that affected regional bank stocks earlier this year again generated substantial paper profits for short sellers, echoing the gains they made during last year's upheaval in the sector. Now analysts are viewing short sellers in a completely new perspective. Carson Block, the founder of Muddy Waters Research, is convinced that markets need short sellers more than ever. However, he notes that a persistent stock rally and new regulatory challenges are creating difficulties for his bearish colleagues, who are struggling to secure capital. Here are some comments from the investor:
“It’s easy to demonize short sellers as part of a populist message and somehow call us the suits. The market needs short sellers more than ever given the amount of games that are being played, but if the long-side doesn’t care, this can continue — until it doesn’t.”
Alongside Block, numerous respected investors and experts have emphasized that short selling plays a crucial role in public markets. It helps enhance price accuracy, ensures better capital allocation, prevents financial bubbles, and uncovers fraud. In 2006, during Berkshire Hathaway's annual shareholder meeting, Warren Buffett highlighted that financially strong companies could benefit from short sellers, as they eventually have to buy back the stock. He believes short sellers often uncover wrongdoing or suspicious activities. Buffett remarked that there is nothing inherently wrong with short selling, noting that in many cases where there has been significant short interest, the companies involved were later exposed as fraudulent or engaging in questionable practices. With this, we will take a look at some of the best Warren Buffett dividend stocks according to short sellers.
Our Methodology:
For this list, we first scanned Berkshire Hathaway’s 13F portfolio as of Q2 2024 and identified dividend stocks from the list. From that list, we shortlisted dividend companies with the lowest percentage of shares outstanding that were sold short as of September 15 and ranked them in descending order of the stocks’ short interest.
We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 912 funds as of Q2 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of an insurance agent's hand pointing to a marine insurance policy, highlighting the company's expertise in marine coverage.
Chubb Limited (NYSE:CB) is an American Swiss insurance company that offers a wide range of related products and services to its consumers. The company is attracting interest from investors because, like dividend-paying stocks, insurance firms generally don’t promise quick, large-scale returns. However, they are reliable businesses that steadily grow over time thanks to their role in risk management. Chubb Limited focuses on building tailored customer relationships through independent agents, offering coverage options that are often hard to find with other insurers. Since the start of 2024, the stock has surged by over 27%, outperforming the broader market, which gained nearly 19% during this period.
In the second quarter of 2024, Chubb Limited (NYSE:CB) reported net premiums of over $11.7 billion, which showed a 10.3% growth from the same period last year. The company's cash position was also strong as it generated $4.08 billion in operating cash flow. Its cash position allowed it to return $369 million to shareholders through dividends during the quarter.
Chubb Limited (NYSE:CB) offers a quarterly dividend of $0.91 per share, having raised it by 6% in May this year. This marked the company's 31st consecutive year of dividend growth, which makes CB one of the best Warren Buffett dividend stocks. The stock has a dividend yield of 1.26%, as of September 15.
At the end of Q2 2024, 46 hedge funds tracked by Insider Monkey reported having stakes in Chubb Limited (NYSE:CB), down from 53 in the previous quarter. These stakes have a total value of over $8 billion. With over 27 million shares, Berkshire Hathaway was the company's leading stakeholder in Q2.
Overall CB ranks 7th on our list of the best Warren Buffett dividend stocks to buy. While we acknowledge the potential for CB as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
