The S&P 500's 5 Most Hated Stocks

Even though the past few days have been a bit rough on optimists, the broad-based S&P 500 (SNPINDEX: ^GSPC  ) ended May with its seventh straight month of gains. While not all U.S. economic data would concur that the economy is on the mend, a downtrend in the unemployment rate, coupled with a strengthening housing sector and rising consumer sentiment, appears to signal sustainability in this rally.

However, not everyone agrees that the market has a shot at heading higher. In fact, plenty of obstacles stand in the way, including the 800-pound gorilla known as the Federal Reserve, which has the potential to cripple housing and loan growth when it eventually pares back its monthly $85 billion bond-buying program consisting of U.S. long-term Treasuries and mortgage-backed securities.

In response to these concerns, certain companies within the S&P 500 have seen quite a bit of interest from pessimists in the form of short-selling. Today, I propose we once again examine the five most shorted S&P 500 companies, establish why investors are betting against them, and see whether this pessimism is warranted.

Company

Short Interest as a % of Shares Outstanding

Pitney Bowes (NYSE: PBI  )	28.8%
GameStop (NYSE: GME  )	28.61%
U.S. Steel	28.57%
Cliffs Natural Resources (NYSE: CLF  )	26.88%
Frontier Communications (NASDAQ: FTR  )	23.72%

Source: S&P Capital IQ.

Pitney Bowes
Why are investors shorting Pitney Bowes?

Mail hardware and software solutions company Pitney Bowes assumes the top spot among the S&P 500's most hated stocks this month despite a marginal drop in short interest from the previous month. The story here is still the same: Physical mail volumes are falling as email and other forms of digital communication slowly make some of Pitney Bowes' products obsolete. This has translated into a precipitous decline in revenue since 2008 and a 50% reduction of the dividend just a few weeks ago.

Is this short interest warranted?

If you can show me a reason to get excited about owning Pitney Bowes, then I can show you a flying unicorn! The company did recently hire Roger Pilc as its new chief innovation officer from CA Technologies in the hope that he can reinvigorate the company's software solutions and cloud segment. However, with the dividend halved and revenue falling, the long-term trend certainly isn't in Pitney Bowes' favor. I'd still pass on the stock at these levels.

GameStop
Why are investors shorting GameStop?

GameStop saw quite the drop in short interest last month -- well more than 8 percentage points -- following a huge run-up in anticipation of two new gaming consoles due to hit the market in the second-half of the year: the Xbox One and the PlayStation 4. However, short-sellers are vigilant in their pessimism, because these new consoles have safeguards built in to ensure that games cannot be resold as used. GameStop currently makes a pretty penny from buying back and reselling used games, so this threatens to take a bite into GameStop's cash flow. 

Is this short interest warranted?

Although I've taken a pretty hardline stance favoring GameStop over the long run, even I see good reason to take some profit off the table after this incredible run. GameStop is making good headway in transitioning users to its digital platform, and it has been proactive in cutting expenses and closing stores prior to the unveiling of these new consoles. It will, however, face the potential for lower margins as its used-game sales slow in the coming quarters. That being said, I'd much rather wait for a sizable pullback before pulling the trigger on GameStop again.

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

Just like we witnessed with the previous two companies, U.S. Steel saw its short interest fall in May, but that still hasn't alleviated the pessimism surrounding steel prices, rampant oversupply, and the belief that weak steel demand in Europe and other developed countries will continue to weigh on its prospects. It also doesn't help that Goldman Sachs recently lowered its steel-price estimates due to falling iron-ore prices.

Is this short interest warranted?

I do fully expect China and other emerging markets to step up at some point in the not-so-distant future and add the demand sorely missing from developed countries at the moment. That still won't make U.S. Steel a particularly intriguing option: It has a mountain of debt and hasn't turned an annual profit since 2008. U.S. Steel just might be your worst possible choice in the steel sector, and I'd suggest looking elsewhere.

Cliffs Natural Resources
Why are investors shorting Cliffs Natural Resources?

Iron-ore and metallurgical-coal miner Cliffs Natural has attracted the interest of short-sellers as iron ore prices have retreated to levels not seen since last summer. Iron ore, a key component to steel, has fallen for many of the same reasons U.S. Steel is weak: Demand isn't there, and oversupply remains an issue. These issues caused Cliffs to slash its dividend by a whopping 76% earlier this year in order to cut expenses and conserve its cash flow.

Is this short interest warranted?

Unlike U.S. Steel, Cliffs Natural is capable of turning a profit in a slow-growth environment and has done a good job of rewarding shareholders with a big dividend in recent years. To me, it seems only a matter of time before iron ore prices rebound and emerging markets fill the void in demand left by much of Europe. I've had Cliffs on my personal Watchlist for some time now and have considered entering a position if it sees extended downside pressures.

Frontier Communications
Why are investors shorting Frontier Communications?

Frontier Communications has struggled under the weight of its asset acquisitions from Verizon. Thinking it would be getting a veritable cash cow of rural landline assets from its purchase, Frontier is discovering that infrastructure upgrades and wireless-device proliferation are making it nearly impossible to grow its bottom line as consumers cancel their landlines at a steady rate. To put things in perspective, you know the landline attrition rate is bad when the highlights of the company's quarterly report include that attrition rates slowed to just 1%! 

Is this short interest warranted?

Everything is going to come down to Frontier's delectable dividend, which is yielding nearly 10%. If Frontier can keep its costs under control and its payout ratio steady, then shareholders could double their money in a tad more than seven years if the yield stays around 10% and they reinvest those dividends. Of course, there are plenty of other variables at play, such as the continued proliferation of mobile devices and whether or not Frontier's ancillary businesses like broadband pick up the slack. Overall, I'm modestly optimistic on Frontier at these levels but would suggest that investors considering this stock understand that it comes with plenty of risks.

Do you feel that any of these S&P 500 companies have been given a bad rap? Share your thoughts in the comments section below.

To be, ore not to be? That is the question...
Cliffs Natural Resources has grown from a domestic iron-ore producer into an international player in both the iron-ore and metallurgical-coal markets. It has also underwhelmed investors lately, especially after its dramatic 76% dividend cut in February. However, it could now be looked at as a possible value play due to several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's premium research report on the company.

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