The S&P 500's 5 Most Hated Stocks

Short-sellers claimed a rare victory over the S&P 500 in January, but they have been unrelenting in their pessimism regarding these five most hated S&P 500 stocks.

Feb 3, 2014 at 6:15PM

January was anything but a banner month for the broad-based S&P 500 (SNPINDEX:^GSPC), with the iconic index turning in one of its worst months in years. Despite this minor victory for short-sellers, it's been a relatively straight shot upward for the index over the past five years.

A number of factors have contributed to the ongoing strength behind the rally in the S&P 500. The U.S. economy delivered 4.1% GDP growth in the third quarter, and preliminary estimates for the fourth quarter show still-robust growth of 3.2%. The manufacturing sector is also showing a healthy expansion, with the Chicago PMI last week coming in with a reading of 59.6 (anything more than 50 signals expansion). The unemployment rate has dropped to 6.7%, its lowest reading since July 2008. In all respects, the nation's economy is giving investors every reason to believe this economic rebound will continue.

Bull And Bear

Source: Eva K., Wikimedia Commons.

But, as a growing number of skeptics will tell you, not everything is as it appears.

Last month, I outlined three ways that U.S. consumers are being tricked into believing the economy is perfectly healthy. While I encourage you to read the more in-depth discussion, the three factors that are masking slower growth are: a falling labor-participation rate, which makes the unemployment rate seem rosier than it actually is; the continuation of quantitative easing, which is artificially keeping interest rates low and spoiling the U.S. consumer; and a dramatic increase in the number of share buybacks and cost-cutting maneuvers used to mask a lack of top-line growth.

With these concerns in mind, I suggest we do what we do every month: take a deeper dive into the S&P 500's five most hated stocks. Why, you ask? Because this way we can better understand what characteristics, if any, attract short-sellers so that we can avoid buying similar companies in the future.

Here are the S&P 500's five most hated companies:


Short Interest as a % of Outstanding Shares

Cliffs Natural Resources (NYSE:CLF)


GameStop (NYSE:GME)


U.S. Steel (NYSE:X)




Frontier Communications


Source: S&P Capital IQ.

Cliffs Natural Resources
Why are investors shorting Cliffs Natural Resources?

  • I've actually lost count of how many months in a row now Cliffs Natural Resources has been the most short-sold company in the S&P 500, but rest assured, it handily held its No. 1 position again in January after a dismal monthly performance. The case against Cliffs Natural Resources remains the same as it's been in previous months: Iron ore prices are weak, and China's manufacturing demand is shrinking, which could reduce its commodity-based demand even further. With Cliffs slashing its dividend last year by roughly three-quarters and not exactly knowing when prices or demand will improve, investors are using this uncertainty to load up on bets against the iron-ore and metallurgical-coal miner.

Is this short interest warranted?

  • I'm a bit torn here, because there's absolutely no reason short-sellers shouldn't be skeptical of Cliffs, given its sizable recent dividend cut and relatively uncertain near-term steel demand. Then again, iron ore prices have staged a sizable rebound from their low point in 2013, and China's commodity demand hasn't tapered off anywhere near as badly as expected. In addition, last week private-equity investment firm Casablanca Capital took a 5.2% stake in Cliffs, sending a letter to management calling for changes, including a spinoff of its Bloom Lake and international assets, as well as a conversion of its U.S. assets into a master limited partnership, which would help the company from a tax perspective and boost shareholder dividends. This activist investor interest, coupled with Cliffs' single-digit forward P/E, make it an attractive company at these levels.

Why are investors shorting GameStop?

  • It's pretty easy to dislike the gaming sector in general, because the timeline for development for new video-game consoles only seems to get longer between each next-generation system. Meanwhile, most games are moving toward a digital format. Also, GameStop's brick-and-mortar presence gives it less flexibility than online game companies, which have lowered overhead costs. Finally, there's the simple fact that the introduction of the PlayStation 4 and Xbox One in 2013 will make comparable-store sales practically impossible to top over the coming year. In other words, it's a "buy the rumor, sell the news" type of scenario.

Gamestop Store Corp
Source: GameStop.

Is this short interest warranted?

  • Based on GameStop's miserable holiday sales update, I'd say short-sellers have been prescient in their call. In mid-January GameStop noted that global sales jumped 9.3% to $3.15 billion for the holiday season, but its growth was offset by a big reduction in Xbox 360 and PlayStation 3 sales (as if this were somehow unforeseen?). Ultimately, GameStop lowered its fourth-quarter earnings-per-share guidance to a range of $1.85-$1.95 from prior expectations of $1.97-$2.14, and the stock tanked. While GameStop will have a downside buffer due to its strong cash flow and high margins from reselling used games, it will find same-store comparisons increasingly difficult over the coming years and is unlikely to see another next-generation console boost for a number of years. It may be time for optimists to begin heading for the exits.

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

  • The bet against U.S. Steel has been a bet against an increase in steel prices and demand domestically and from China. Although this has been a trend we've witnessed across much of the sector, it has hit U.S. Steel particularly hard because the company carries a higher percentage of debt relative to equity than most of its peers. Another factor that has really sacked U.S. Steel, at least in the past couple of quarters, has been a number of one-time charges that have resulted in exorbitant noncash EPS losses.

Is this short interest warranted?

  • After a near-doubling in the share price since May, short-sellers have every right to be skeptical of U.S. Steel. The steelmaker's fourth-quarter results on Jan. 27 delivered a much-welcomed adjusted EPS profit of $0.27, compared to a hefty year-ago loss as demand and pricing for a number of its products improved and its expenses dipped. However, looking ahead, the company's critical tubular-products segment is expected to see pricing weakness in the first quarter, and it's still dealing with $3.3 billion in net debt, which may make it difficult for U.S. Steel to make strategic moves, should the opportunity or need arise. A forward P/E of 12 may not seem expensive, but when you're dealing with minimal top-line growth and a lot of debt, it's a good recipe for attracting short-sellers.

Why are investors shorting ADT?

  • As we saw last month, short interest in electronic security solutions provider ADT has been rising precipitously in the past couple of months, but until recently it had been a bit of a struggle to figure out why. The prevailing thesis pessimists were relying on was the company's weak top-line growth and hefty share buybacks that masked weaker operational EPS and margin growth. Add in a significant amount of debt, and short-sellers have been betting on ADT to tumble.

Is this short interest warranted?

  • Based on ADT's first-quarter results, I'd say this short interest is unequivocally deserved. For the quarter, reported late last week, ADT saw a revenue increase of just 4% as EPS dipped 11% despite the company's best efforts to buy back shares. The long-term problem for ADT, which doesn't have a visible solution at present, is how it will lower its subscriber acquisition costs and retain existing customers without having to spend a boatload of money. With $4.4 billion in debt, it's not as if ADT has a lot of flexibility, in my view. Pessimists have every reason to sink their teeth into ADT here.

Frontier Communications
Why are investors shorting Frontier Communications?

  • Telecom service provider Frontier Communications has actually seen a minor retracement in short interest over the past couple of months. Pessimists have been generally sticking to Frontier because of its ill-timed purchase of landline assets from Verizon a few years back, which left it with a hefty amount of debt and an ongoing exodus of landline customers who no longer need a home phone as cellphone service improves into rural areas. These short-sellers are counting on a possible third dividend cut for Frontier in order to save capital and an ongoing drop in high-margin landline customers.

Is this short interest warranted?

  • While Frontier has done little to slow the attrition of landline customers -- and it's not as if much can be done -- it has still generated significant cash flow and healthy margins from these customers, which is allowing it to reduce debt and pay out an 8% yield. Generally speaking, short-sellers don't like high-yielding companies as they can be painful in the pocketbooks come dividend time, since short-sellers owe what currently amounts to 8% per year in stipends. With Frontier confident that it can maintain cash flow to pay down its debt and continue to generate $0.40 in annual dividends, I see few telltale downside catalysts.

The No. 1 Way to Lose Your Wealth Without Even Knowing It
You’ve fought hard to build wealth for you and your family. Yet one all-too-common pitfall could completely derail your dreams before you even know it. That's why a company The Economist hails as "an ethical oasis" has isolated five simple questions you must answer to ensure that your financial future is really secure.

Can you answer YES to all five of these eye-opening questions?
Click here to find out -- before it’s too late!

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers