The S&P 500's 5 Most Hated Stocks

It's getting considerably harder to find any pessimists on Wall Street as the broad-based S&P 500 (SNPINDEX: ^GSPC  ) continues its steep march higher. The labor market is slowly improving -- unemployment rates hit their lowest level in five years last week -- and earnings within the index have generally come in ahead of the Street's expectations.

But if you look hard enough, you'll still find quite a bit of skepticism building up around some of the components of the S&P 500. We're all well aware that no market can go straight up forever, so these pessimists may indeed have a point.

Today, I propose we look at the five most hated companies within the S&P 500 -- at least from a short-interest standpoint -- and determine why short-sellers have singled these companies out and whether or not the lack of faith is deserved.

Company

Short Interest as a % of Shares Outstanding

GameStop (NYSE: GME  )

37.17%

U.S. Steel (NYSE: X  )

29.33%

Pitney Bowes

29.19%

J.C. Penney (NYSE: JCP  )

25.62%

Frontier Communications (NASDAQ: FTR  )

23%

Source: S&P Capital IQ.

GameStop
Why are investors shorting GameStop?

  • Following a run-up of more than 45% over the past six weeks, this month short-sellers have entrenched themselves even deeper into GameStop than last. The thesis here remains the same: Brick-and-mortar gaming stores will be unable to compete with a growing consortium of digital and streaming gaming options. In addition, if Microsoft or Sony could successfully reduce or eliminate GameStop's ability to resell used games, it would be a margin destroyer.

Is this short interest warranted?

  • Even I have to step back and wonder whether this huge run-up over the past couple weeks is deserved. I do like GameStop over the long run because of its steady cash flow, but it doesn't have all of its ducks in a row yet with regard to digital-based gaming solutions. Then again, with a new Xbox gaming console and the PlayStation 4 due out later this year, I think you'd have to be crazy to bet against GameStop with the biggest catalyst in years right around the corner.

U.S. Steel
Why are investors shorting U.S. Steel?

  • Don't feel bad, U.S. Steel shareholders: Nearly the entire metals sector has been blasted by short-sellers in recent months. With regard to U.S. Steel, short-sellers have dug their feet in on the notions that steel prices will remain under pressure because of oversupply; that demand will remain weak so long as China's GDP growth remains below its 30-year average of 10%; and that U.S. Steel's large debt load will weigh on its share price.

Is this short interest warranted?

  • I'll certainly allow that short-sellers have ample reason to be concerned about U.S. Steel's growth prospects. In the company's first-quarter results, released last week, it badly missed EPS estimates by reporting a loss $0.15 wider than expected and alluded that things are likely to get worse before they get better. I feel there are much better options in the steel sector with less net debt than U.S. Steel, and I encourage investors to give this stock a wide berth.

Pitney Bowes
Why are investors shorting Pitney Bowes?

  • Short interest in mail hardware and software solutions provider Pitney Bowes has remained about the same, month over month, as investors continue to expect that digital forms of communications (i.e., email) will make standard mail obsolete. Given the visible signs of struggle at the U.S. Post Office, which is a big customer of Pitney Bowes, investors have positioned themselves to expect ongoing revenue erosion from the company.

Is this short interest warranted?

  • Based on the reaction in share prices shortly after Pitney Bowes released first-quarter results last week, I think a high level of short interest is justified. Pitney Bowes has zero revenue growth catalysts on the horizon, and it slashed its dividend by 50% to just $0.75 annually in order to reduce cash outflow. Although it still yields at an attractive level, I fail to see any reason why Pitney Bowes is an attractive buy.

J.C. Penney
Why are investors shorting J.C. Penney?

  • Are there any reasons left not to bet against struggling department store J.C. Penney? The company alienated many of its core customers by removing sales and introducing everyday pricing. In addition, its store-within-a-store concept has hit a roadblock with ongoing litigation between Penney and Macy's over the use of the Martha Stewart Living brand in its stores.

Is this short interest warranted?

  • I should say so! J.C. Penney is working on its next series of ads, which is nothing more than a mea culpaafter it messed up. That worked for Domino's Pizza in the past, but we're talking about more than just a pizza here! Penney's has taken the initial step of reintroducing its discount price strategy to drive business and hopefully regain lost customers, but the simple fact that it rehired Mike Ullman -- the same CEO whom Ron Johnson replaced and who caused at least some of Penney's current problems -- doesn't sit well with me.

Frontier Communications
Why are investors shorting Frontier?

  • Frontier makes its debut among the S&P 500's most short-sold stocks on the thesis that its landline business (and thus the beefy margins that go with it) are slowly eroding. Frontier is doing what it can to following Comcast's lead by bundling services in order create more loyal customers, but as wireless coverage gets better and extends into more rural areas, Frontier could find itself even more exposed to landline attrition.

Is this short interest warranted?

  • I'd certainly say some level of skepticism is warranted, given the slow but steady decline in landline customers. Frontier will have to present a clearly outlined growth strategy to Wall Street for investors to have any hope of seeing the share price take off. One bonus is that Frontier has kept its nearly 10% dividend yield intact -- but as we saw with Pitney Bowes, that may prove meaningless if there's no growth to back that cash flow up.

Which company do you feel has been given a bad rap? Share your thoughts in the comments section below.

Is this juicy dividend doomed?
When it comes to dividend yields, you won't find many higher than Frontier Communications'. While the meaty dividend is tempting, every Frontier investor has to understand that it's not a sure thing. A huge acquisition has transformed the company forever. Will the move bear fruit, or are investors destined for another disappointing dividend cut? In this premium research report on Frontier Communications, we walk you through all of the key opportunities and threats facing the company.


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Related Tickers

10/20/2014 9:30 AM
^GSPC $1885.46 Down -1.30 -0.07%
S&P 500 INDEX CAPS Rating: No stars
FTR $6.08 Down +0.00 +0.00%
Frontier Communica… CAPS Rating: ***
GME $39.86 Down +0.00 +0.00%
GameStop CAPS Rating: *
JCP $7.25 Down +0.00 +0.00%
J.C. Penney Compan… CAPS Rating: *
X $33.63 Down +0.00 +0.00%
United States Stee… CAPS Rating: **

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