It’s getting considerably harder to find any pessimists on Wall Street as the broad-based S&P 500 continues its steep march higher. The labor market is slowly improving — unemployment rates hit their lowest level in five years last week — and earnings within the index have generally come in ahead of the Street’s expectations.
But if you look hard enough, you’ll still find quite a bit of skepticism building up around some of the components of the S&P 500. We’re all well aware that no market can go straight up forever, so these pessimists may indeed have a point.
Today, I propose we look at the five most hated companies within the S&P 500 — at least from a short-interest standpoint — and determine why short-sellers have singled these companies out and whether or not the lack of faith is deserved.
| Company | Short Interest as a % of Shares Outstanding |
|---|---|
| GameStop (NYSE:GME) | 37.17% |
| U.S. Steel | 29.33% |
| Pitney Bowes | 29.19% |
| J.C. Penney | 25.62% |
| Frontier Communications (NASDAQ:FTR) | 23% |
Source: S&P Capital IQ.
Why are investors shorting GameStop Corp. (NYSE:CAG)?
- Following a run-up of more than 45% over the past six weeks, this month short-sellers have entrenched themselves even deeper into GameStop Corp. (NYSE:CAG) than last. The thesis here remains the same: Brick-and-mortar gaming stores will be unable to compete with a growing consortium of digital and streaming gaming options. In addition, if Microsoft Corporation (NASDAQ:MSFT) or Sony Corporation (ADR) (NYSE:SNE) could successfully reduce or eliminate GameStop Corp. (NYSE:CAG)’s ability to resell used games, it would be a margin destroyer.
Is this short interest warranted?
- Even I have to step back and wonder whether this huge run-up over the past couple weeks is deserved. I do like GameStop Corp. (NYSE:CAG) over the long run because of its steady cash flow, but it doesn’t have all of its ducks in a row yet with regard to digital-based gaming solutions. Then again, with a new Xbox gaming console and the PlayStation 4 due out later this year, I think you’d have to be crazy to bet against GameStop Corp. (NYSE:CAG) with the biggest catalyst in years right around the corner.
United States Steel Corporation (NYSE:X)
Why are investors shorting United States Steel Corporation (NYSE:X)?
- Don’t feel bad, United States Steel Corporation (NYSE:X) shareholders: Nearly the entire metals sector has been blasted by short-sellers in recent months. With regard to United States Steel Corporation (NYSE:X), short-sellers have dug their feet in on the notions that steel prices will remain under pressure because of oversupply; that demand will remain weak so long as China’s GDP growth remains below its 30-year average of 10%; and that United States Steel Corporation (NYSE:X)’s large debt load will weigh on its share price.
Is this short interest warranted?
- I’ll certainly allow that short-sellers have ample reason to be concerned about United States Steel Corporation (NYSE:X)’s growth prospects. In the company’s first-quarter results, released last week, it badly missed EPS estimates by reporting a loss $0.15 wider than expected and alluded that things are likely to get worse before they get better. I feel there are much better options in the steel sector with less net debt than United States Steel Corporation (NYSE:X), and I encourage investors to give this stock a wide berth.
