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The S&P 500's 5 Most Hated Stocks

By Sean Williams - Apr 5, 2013 at 4:45PM

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Short-sellers are piling into these five S&P 500 components. Is their pessimism warranted?

The first quarter officially came to a close last weekend and ended on a perfect note for the broad-based S&P 500 (^GSPC 0.01%) -- at an all-time record high. Economic data has been slowly improving on the jobs front, as well as many other sectors of the economy, suggesting that the S&P 500's 10% rally in the first quarter may be sustainable.

However, quite a few skeptics still don't see the market's gains as sustainable. The actions of these skeptics can be seen in these five most hated S&P 500 companies:

Company

Short Interest as a % of Shares Outstanding

GameStop (GME -3.56%)

34.78%

Pitney Bowes (PBI -1.09%)

29.57%

J.C. Penney (JCPN.Q)

27.76%

U.S. Steel (X -1.90%)

25.71%

Safeway

23.75%

Source: S&P Capital IQ.

What I propose we do is simple: Let's have a look at why investors might be betting against these five companies, and then we'll determine whether or not their pessimism is warranted.

GameStop
Why are investors shorting GameStop?

  • The contempt for GameStop begins with the cyclical nature of the video game industry. GameStop, which is a retail outlet for video games, consoles, and other gaming accessories, has had its margins come under serious pressure as digital outlets for downloading and playing games have emerged and taken revenue away from its brick-and-mortar locations. Further, we haven't seen any new gaming consoles in years, which has tempered gamers' desire to spend freely in GameStop's stores.

Is this short interest deserved?

  • I believe this pessimism is undeserved for a number of reasons. First, we have a slew of new gaming consoles due out in the second half of this year that are likely to spur GameStop's sales. Second, GameStop has remained healthfully cash-flow positive despite the industry's cyclical nature. A tight lid on costs, as well as a focus on enhancing digital offerings, actually resulted in the company's highest gross margin in a decade in 2012. Finally, GameStop's 4% yield asserts that short-sellers are barking up the wrong tree.

Pitney Bowes
Why are investors shorting Pitney Bowes?

  • Pitney Bowes, known best for its postage meters and other mail-related software, has struggled with the proliferation of Internet-based postage purchases and declining physical mail volumes. The company is attempting to reorganize its business to focus more on cloud-based and service-oriented models, but it also has to contend with more than $4 billion in net debt on its balance sheet.

Is this short interest deserved?

  • I would tentatively say yes, based on the business model alone. It's will be difficult for Pitney Bowes to dissociate itself from its legacy postage-meter business and move into an enterprise-based cloud platform. Then again, Pitney Bowes' only lifeline has been its insistence on keeping its dividend firm at $1.50 a year. That's good enough for a 10.1% yield, but it negates much chance that the company will pay down its enormous debt load.

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

  • Unless you've been living under a rock, you're probably well aware that the list of reasons to short department store J.C. Penney is about 100 times longer than the list of reasons to buy. Its fourth-quarter results -- which encompassed its all-important holiday-season earnings -- delivered a dismal 31.7% drop in same-store sales as direct-to-consumer sales plunged 34.4%. The company has also recently backpedaled on its "no-sale" pricing strategy in favor of returning to its previous pricing strategy.

Is this short interest deserved?

  • Yes! Yes! A thousand times yes! J.C. Penney's management team looks like a deer in the headlights at the moment with the way it's backpedaling on its pricing strategy and the rollout of its store-within-a-store concept. CEO Ron Johnson attempted to dictate consumer wants and needs as he did when he ran Apple's stores, but it failed miserably with regard to apparel and accessories. Penney's lost close to $1 billion last year, and there's no indication that things have improved, which gives short-sellers plenty of ammunition moving forward.

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

  • U.S. Steel has drawn the ire of investors because of a mixture of weak steel prices, reduced steel demand in the U.S. and overseas, and its nearly $3.4 billion in net debt. U.S. Steel's fourth-quarter loss was a significant improvement over the year-ago period, but the company still ultimately recorded a $353 million annual loss because of the sale of its U.S. Steel Serbia operations.

Is this short interest deserved?

  • While I favor the steel sector over the long run, there is no immediate catalyst that would send steel prices higher or create a lot of immediate demand outside of China. Add the fact that U.S. Steel has one of the highest debt-to-equity ratios among its peers, and I think short-sellers have every reason to sink their teeth in and not let go.

Safeway
Why are investors shorting Safeway?

  • The most obvious reason to bet against Safeway would be the assumption that its 41% year-to-date rally isn't sustainable, given its profit margin of just 1.35% over the trailing 12 months. The probability of high food-inflation costs, as well as sales lost to discount stores due to higher payroll taxes and delayed tax refunds, could also be pushing short-sellers over the hump.

Is this short interest deserved?

  • Absolutely not. Safeway may have taken a page out of Whole Foods' book and emulated the natural and organic powerhouse by remodeling its stores and supplying consumers with more nutritious food options, and it's working! Food inflation costs aren't a big concern among grocers at the moment, and the expected second-quarter spinoff of Safeway's interests in prepaid-gift-card company Blackhawk Network Holdings is only bound to light a fire under Safeway's share price. This is a company short-sellers should truly reconsider betting against.

Which most-hated S&P 500 company do you have on your radar? Tell everyone below in the comments section.

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Stocks Mentioned

S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$3,901.36 (0.01%) $0.57
Pitney Bowes Inc. Stock Quote
Pitney Bowes Inc.
PBI
$4.53 (-1.09%) $0.05
United States Steel Corporation Stock Quote
United States Steel Corporation
X
$23.79 (-1.90%) $0.46
GameStop Corp. Stock Quote
GameStop Corp.
GME
$95.66 (-3.56%) $-3.53
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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