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Cliffs Natural Resources Inc (CLF), Pitney Bowes Inc. (PBI): Do These Hated Companies Offer Opportunities for Profit?

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I tryto invest with a contrarian view, so I like to go against the market. To that end one of my favorite ways to find opportunities for investment is by looking through the most shorted stocks in the S&P 500, to see if I can spot anything others can’t.

So, with that in mind, here are the three most shorted companies in the S&P 500 right now and their future outlook; is there something others have missed?

The most hated

The most shorted company in the index, with nearly 37% of the available stock on loan is Cliffs Natural Resources Inc (NYSE:CLF). Traders are betting that falling coal and iron prices will hit the company hard. This is a very real prospect as the price of thermal coal is currently $55 per ton, the lowest it has been since April 2010. In addition, the price of iron ore pellets is down to $144 per ton, not as low as the $120 per ton seen back in mid-2012, but still lower than the yearly average price seen in 2010, 2011 and 2012.

Cliffs Natural Resources Inc (NYSE:CLF)Still, Cliffs Natural Resources Inc (NYSE:CLF) is cash generative and profitable. Furthermore, the company has actually paid down net debt by 21% since the second quarter of last year. Unfortunately, the company has issued some stock to bolster its balance sheet and cash flows. Cash inflows from stock issuance totaled $995 million during the first quarter and $994 million during the second quarter. This allowed the company to both reduce debt and spend on CapEx without taking on additional borrowing; however, this is eroding shareholder value.

The outlook for Cliffs Natural Resources Inc (NYSE:CLF) is cloudy, the steel industry is expected to start growing again this year, which should improves demand for iron ore and coal. That said, a brewing credit bubble in China as well as slowing economic growth in Latin America could rapidly throw the steel market back into contraction.

Overall, the uncertainty surrounding Cliffs Natural Resources Inc (NYSE:CLF) makes me want to stay well away.

A bet on a declining industry

Second, with just under 31% of its free float short, is Pitney Bowes Inc. (NYSE:PBI). Actually, Pitney has seen somewhat of a short-squeeze over the past week after the company reported better than expected second quarter earnings.

Pitney Bowes Inc. (NYSE:PBI) has made several key steps to halt the decline in its stock price. For a start, the company replaced its CEO with IBM veteran Marc B. Lautenbach, who worked at ‘Big Blue’ for 27 years. Second, Pitney slashed its dividend by 50% and started to pay down debt – the company repaid $375 million in debt during the quarter from cash in hand.

Investors have been concerned about Pitney Bowes Inc. (NYSE:PBI)’s exposure to the slowing mail market. However, during the second quarter, revenue from the company’s mail services segment and production mail division expanded 10% and 18%, respectively. It seems as if the decline in the company’s mail related revenue has been stopped for now. The company generated $147 million in free cash flow during the quarter boosting the cash position to $600 million.

On a long term basis, the concerns about the global slowdown in mail shipping seem to be overstated as many key documents, parcels and packages will need to continue to be shipped and Pitney Bowes Inc. (NYSE:PBI) is the best in its industry. In addition, one of the key factors to look for in a failing company is a weak balance sheet and continual loss of cash, Pitney has neither of these. The company is paying down debt with cash on hand, has a strong cash balance and is still producing a good free cash flow.

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