Even though the past few days have been a bit rough on optimists, the broad-based S&P 500 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 Inc. (NYSE:PBI)
Why are investors shorting Pitney Bowes Inc. (NYSE:PBI)?
Mail hardware and software solutions company Pitney Bowes Inc. (NYSE:PBI) 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 Inc. (NYSE:PBI)’ 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 Inc. (NYSE:PBI), 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 Corp. (NYSE:GME)
Why are investors shorting GameStop Corp. (NYSE:GME)?
GameStop Corp. (NYSE:GME) 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 Corp. (NYSE:GME) currently makes a pretty penny from buying back and reselling used games, so this threatens to take a bite into GameStop Corp. (NYSE:GME)’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.
