The S&P 500's 5 Most Hated Stocks

All good things must come to an end, or at least that's what investing skeptics would like to think.

The broad-based S&P 500 (SNPINDEX: ^GSPC  ) has been on an absolute tear since the year began, up 14.4% through Friday's close. It recently logged the strongest start to the first-half of the year in 15 years and has the combination of an improving housing market and ongoing monetary easing to thank for a string of market-topping economic data.

But, could this fairy tale soon come to a screeching halt? Short-sellers certainly think so and have been piling into some of the largest companies in the S&P 500 in anticipation of a slide. As we've done in previous months, I propose we examine the five most hated stocks within the S&P 500, see why the pessimism is so strong in these companies, and decipher whether the high short interest in these stocks is deserved.

Company

Short Interest As a % of Shares Outstanding

Cliffs Natural Resources (NYSE: CLF  )

31.66%

U.S. Steel (NYSE: X  )

30.37%

GameStop (NYSE: GME  )

29.89%

Pitney Bowes (NYSE: PBI  )

27.97%

Frontier Communications

23.40%

Source: S&P Capital IQ.

Cliffs Natural Resources
Why are investors shorting Cliffs Natural Resources?

  • With a nearly 5-percentage-point rise in short interest month over month, iron ore producer Cliffs Natural has ascended to the top of this dubious list. As in previous months, the primary culprit for the pessimism relates to falling iron ore prices. Between February and May, iron ore prices fell from around $155 per metric ton to just $124 per metric ton, putting Cliffs profitability into question. In response, Cliffs has put some of its exploratory mining activities on hold for the time being.

Source: Peter Craven, Flickr.

Is this short interest warranted?

  • It's certainly hard to argue against short-sellers who've been dead right thus far with Cliffs ending at a new 52-week low on Friday. However, I continue to see the bright side of a company that supplies iron ore used in steel making and other heavy construction. Concerns about growth in China are Cliffs latest worry, but even then shareholders' reaction to continue selling may be a bit overblown. Cliffs is still healthfully profitable, trading for less than half its book value, and pays out a yield closing in on 4%. I have it firmly attached to my Watchlist as a possible buy.

US Steel
Why are investors shorting US Steel?

  • Just like Cliffs Natural, U.S. Steel's story has to do with weak steel prices making it practically impossible for it to turn a profit, and an endless sea of supply that never wants to reduce enough to give the steel producers any pricing power. U.S. Steel has done its best to reduce its own supply, but that hasn't helped much with even China's growth slowing and a credit crunch in the country threatening to further depress economic activity.

Is this short interest warranted?

  • Even though I wholeheartedly agree that short-sellers have every right to be skeptical of U.S. Steel, the pessimists have been burnt badly over the past week with multiple steel pipe producers, including U.S. Steel, signing petitions against nine countries for anti-dumping practices. If US Steel gets its way, it may soon have a level playing field in Asia and its sales could come roaring back. I'd still suggest calmer heads prevail here as it's really U.S. Steel's $3.2 billion in net debt that has me most concerned.

GameStop
Why are investors shorting GameStop?

  • Short-sellers have piled into GameStop in anticipation of the launch of Microsoft and Sony's next-generation gaming consoles. We'd been hearing for months that licensing aspects of the new systems were going to be much more stringent than in previous models which are a cause for concern for GameStop since it makes most of its profit from the sale of used games. In addition, as a bricks-and-mortar store, there is an ongoing worry that it's falling behind its peers in digital gaming.

Is this short interest warranted?

  • As an addendum to the above, probably not! Microsoft and Sony have predominantly changed their tune and will allow used games to be sold through authorized channels, including GameStop. That's a big relief for GameStop and its shareholders since used game sales are single-handedly its biggest margin booster. GameStop certainly isn't out of the woods as we've seen it can take years in between developing new consoles. Once the allure of the new systems fades in a year, GameStop may find its year-over-year comparisons to be impossible to top.

Pitney Bowes
Why are investors shorting Pitney Bowes?

  • Pitney Bowes may have fallen from its perch as the S&P 500's most short-sold stock, but short-sellers have hardly relinquished their stranglehold on the supplier mail hardware and software solutions. With nearly everything now in digital platform and mail volume slowly dwindling, Pitney Bowes is needing to reinvent itself quickly in order to try and reverse a four-year ongoing downtrend in revenue. Tack on a recent 50% cut to its dividend, and you have all the fodder needed to attract pessimists.

Is this short interest warranted?

  • This may not be a case of "how bad could it get" so much as a case of "what would make things good again?" There just aren't any catalysts I see that would dramatically turnaround Pitney Bowes' fortune anytime soon. Its double-digit yield had been the one defining factor that kept investors coming back, but its current yield near 5% isn't nearly as enticing when you consider its down-sloping revenue forecast. I'd strongly suggest not being lured in by this dividend and steering clear of Pitney Bowes until you see well-defined progress in the top line.

Source: Anna Langova, PublicDomainPictures.net.

Frontier Communications
Why are investors shorting Frontier Communications?

  • Despite bringing in ample and somewhat predictable cash flow that's resulted in a delectable 10% yield, short-sellers have piled into Frontier Communications because it's been bleeding rural landline customers. Frontier made quite the gamble by picking up Verizon's landline assets a few years back which hasn't panned out as expected due to the expansion of 4G-capable wireless networks.

Is this short interest warranted?

  • If your investment thesis involves having Frontier stay profitable, then short-sellers are playing with fire. If Frontier is able to maintain its dividend, by simply reinvesting the payout investors could double their original investment in a tad over seven years. Frontier's cash flow looks consistent enough at the moment to merit the 10% yield, although I'd keep your eye on its rural landline attrition rate for clues about where it's heading next.

Which of the S&P 500's most hated stocks has the best chance of heading higher from here? Share your thoughts in the comments section below.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. One need only look at the above five companies for confirmation of this. But, they shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 06, 2013, at 9:57 PM, peterwolf wrote:

    Wonderful. I own two of them. Typical of my investing stupidity.

  • Report this Comment On July 11, 2013, at 10:49 AM, dogbot wrote:

    Looking at a company like Pitney Bowes I must wonder what the value is. If you take the future cash flows models you have to analyze the probability that the dividend will decrease again else you could value it like a bond in which case the yield is fair compared with the risk free rate. The other thing is can this company leverage its huge database of customers. Finally will there be growth in the Geo tracking software. certainly the value isn't zero but is $14 per share to high or too low.

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