The S&P 500's 5 Most Hated Stocks

I'm not even certain that Superman could stop the broad-based S&P 500 , which has set a number of new all-time highs this year. Many of the S&P 500's components are utilizing historically low lending rates to refinance their debt and make strategic acquisitions while also carefully scaling back expenses to bolster their bottom lines. It's hard to believe that four-and-a-half years ago we were in the 600s -- now we've eclipsed 1,700!

However, just as we have "glass half-full" investors, there are plenty of other investors out there who see the market -- especially the broad-based S&P 500 -- as overextended. These skeptics see a market driven largely by cost-cutting instead of top-line growth, reliant on artificially low lending rates created by the Federal Reserve's ongoing quantitative easing. Once QE3 ends, the thesis is that the S&P 500 could be in big trouble when rates again begin to rise.

That being said, short-sellers have been relentless in their pursuit of five specific S&P 500 stocks -- we'll call them the S&P 500's most hated stocks. Let's have a look at which companies make the cut and determine what it is about them that short-sellers dislike so we can avoid similar companies in the future.

Company

Short Interest as a % of Shares Outstanding

Cliffs Natural Resources

36.51%

Pitney Bowes

30.45%

U.S. Steel

29.73%

Frontier Communications

24.26%

GameStop

23.64%


Source: S&P Capital IQ.

Cliffs Natural Resources
Why are investors shorting Cliffs Natural Resources?

  • The reason Cliffs Natural saw its short interest rise by nearly 5 percentage points for a second straight month is growing pessimism regarding commodity prices. Precious metals, as well as iron ore and coal, have been under serious pressure for the past year, and short-sellers had been betting on a poor second-quarter earnings report from Cliffs. In previous reports, Cliffs had slashed its dividend and drastically reduced its operating budget, so the possibility for a shortfall was certainly there.

Is this short interest warranted?

  • I'd be a fool not to recognize why short-sellers are betting against Cliffs, given the weakness in iron-ore pricing and demand, as well as low demand for metallurgical coal (in which Cliffs is a small-time player). Short-sellers were in for a rude awakening, though: The company's second-quarter results two weeks ago delivered a bigger-than-expected quarterly profit of $0.87 per share compared to the Street's estimates of $0.58 in EPS. Revenue of $1.5 billion -- a 6% decrease from the previous year -- was also much stronger than expected. If my arm were twisted, I'd say Cliffs is a lot closer to a $30 stock than a $10 stock, and I'd suggest that short-sellers reconsider their position in Cliffs Natural.

Pitney Bowes sorting machine. Source: Joe Hall, Flickr.

Pitney Bowes
Why are investors shorting Pitney Bowes?

  • The story on Pitney Bowes has been the same for years. This company develops software and hardware for the logistics industry -- the United States Postal Service is a major customer. Many investors who don't see the traditional mail industry turning around -- ever -- have taken to attacking the next best thing: Pitney Bowes. With revenue down every year since 2008 and Pitney Bowes slashing its dividend in half in April, pessimists have all the reasons they need to stay decidedly bearish on the company.

Is this short interest warranted?

  • However, just as we saw with Cliffs Natural, high levels of short interest came back to bite pessimists in the backside when Pitney Bowes reported encouraging second-quarter results last week. The big news was the sale of its management service unit to Apollo Global Management for $400 million, but its EPS beat of $0.09 shared the spotlight. Despite the pop, and the cash that will be used as a buffer to help pay out its impressive 4.3% yield, Pitney Bowes hasn't addressed any growth issues and still plans to get by in the interim with cost-cutting. I'd still say short-sellers have a good shot at being right here over the long run.

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

  • In a situation very similar to Cliffs Natural's, short-sellers have repeatedly piled into U.S. Steel on the expectation that steel demand will remain weak, oversupply will remain high, and the company will have no choice but to idle more capacity to get back toward breakeven. Adding even more fuel to the fire is the fact that China's GDP growth has slowed well below its 30-year average. Given U.S. Steel's high debt levels and little pricing power, short-sellers expect further downside.

Is this short interest warranted?

  • Compared to the previous two companies, investors didn't receive U.S. Steel's earnings nearly so well. Reporting its second-quarter results last week, U.S. Steel delivered a smaller-than-expected loss of just $0.54 per share compared to the forecast of -$0.78 per share. But this loss reversed a year-ago gain and added to an already weak forecast calling for more struggles in Europe and ongoing losses. As I continue to say, U.S. Steel's high levels of debt put it at a strategic disadvantage relative to many of its peers. If you must own a steel stock, I'd strongly suggest looking elsewhere in the industry.

Source: Karolina Kabat, Flickr.

Frontier Communications
Why are investors shorting Frontier Communications?

  • The reason pessimists are increasingly shorting Frontier has to do with its reliance on landline customers, who have been leaving with some regularity because of the proliferation of wireless services in rural areas. Frontier has done its best to expand into broadband services and lure customers with competitive price packages, but that hasn't stopped a revenue slide similar to Pitney Bowes'.

Is this short interest warranted?

  • It's a bit tough to tell at this point, because unlike the previous three companies on this list, Frontier has yet to report its quarterly results. One thing is for certain, though: Frontier's dividend will remain unchanged at $0.10 per share for at least the next quarter. A dividend cut would have been pretty telling to investors, so the simple fact that Frontier is keeping its yield near 9% should encourage long-term investors that its cash flow will remain steady. I'm erring on the side of bullishness moving forward, but I also fully understand why short-sellers are in this stock.

GameStop
Why are investors shorting GameStop?

  • For years, the bet against GameStop had been made on the presumption that gaming-console makers were taking an eternity to develop a new system. That long evolution cycle, along with the rise of digital gaming and the threat that new gaming consoles would have built-in fail-safes to prevent used games from being played on them, compounded with the rise of streaming digital gaming, was enough to pressure GameStop for many quarters.

Is this short interest warranted?

  • Lately, though, the pessimism has had less to do with the gaming evolution cycle, which has actually been a boost for GameStop, given that Sony and Microsoft will allow acceptable forms of second-hand game sales. The short interest owes more to the fact that GameStop's share price has more than doubled since April. GameStop is a cash cow, and expectations are high that the new consoles will sell well, but I can't help but feel that this could be a case of "buy the rumor, sell the news." Short-sellers may be getting burned now, but they could be victorious once these new gaming consoles are released.

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The article The S&P 500's 5 Most Hated Stocks originally appeared on Fool.com.

Fool contributor  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 and Microsoft. 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.

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