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The Most Hated Large Caps

January 3, 2013 1:48 pm
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The Most Hated Large Caps

There are many stocks commonly hated by short sellers. Most traders are familiar with the names: Chipotle (NYSE: CMG), Skullcandy (NASDAQ: SKUL), and Netflix (NASDAQ: NFLX) — just to name a few.

These are all, generally speaking, mid-size companies with business models that might be viewed as trendy.

But, what about the big boys? Those large companies with established business models? Here are four of the most shorted and why:

Chesapeake Energy (NYSE: CHK)

As a natural gas company, Chesapeake Energy had a difficult 2012.

The company has faced abnormally low gas prices, causing shares to drop by nearly a third last year. Chesapeake’s enormous debt load and corporate leadership has also pressured the company.

Chesapeake Energy began working aggressively to reduce its debt burden, selling off assets to raise cash. Most recently, Chesapeake sold its midstream assets to Access Midstream Partners for $2.6 billion on December 13. The company used the proceeds to pay off a significant portion of its debt.

Finding that it couldn’t completely rely on gas prices to bring in revenue, the company attempted to diversify and doubled its oil production year-to-date and increased its total liquid production. Before, natural gas was 80 percent of its total sales, now it only makes up 70 percent. Chesapeake plans to diversify more to reduce revenue dependency on natural gas prices.

Winter 2012 was notably mild, with lower temperatures than expected, decreasing gas demand to the detriment of companies like Chesapeake.

An investigation is still ongoing into the hundreds of millions of dollars borrowed by CEO Aubrey McClendon from businesses that made deals with Chesapeake.

All of these factors make the company’s future murky and a possible target for short sellers.

salesforce.com (NYSE: CRM)

In short, Salesforce is an aggressively valued stock. One that many investors might view as overvalued. Currently, the company is trading with a forward P/E near 85.

Salesforce.com provides customer relationship management (CRM) software through cloud-computing companies and incorporate a focus on social connectivity within it. Cloud computing offers a way for businesses to improve productivity, cut unnecessary costs, and increase the level of mobility and flexibility.

Competitor Oracle (NASDAQ: ORCL) has been expanding its reach into cloud computing, most recently by purchasing Eloqua for $810 million. Although Salesforce has been dominating the field, this purchase will help give Oracle more of an advantage and draw more customers that might have otherwise gone to Salesforce.

To be sure, Salesforce is one of the fastest growing tech stocks around. But, it can be a tough stock to invest in because of its volatility.

As expensive as Salesforce is right now, it’s hard to determine whether or not they will be successful in the future. With more experienced competing companies in the way, Salesforce has a lot to prove to investors who are counting on the company to be able to obtain a dominant position in the market.

Seagate (NASDAQ: STX)

Seagate primarily produces hard drives for PCs. As the demand for PCs has fallen, hard disk drive companies such as Seagate could be expected to disappoint.

Recently, the rise of ultrabooks has shifted the demand from standard hard drives to solid state. Seagate has little exposure to the solid state market.

Still, hard disk drives are used in more than just PCs and laptops. Servers, many game consoles and home entertainment devices have HDDs, giving some room for growth. The rise of cloud computing could increase the demand for servers, benefitting Seagate.

Campbell Soup (NYSE: CPB)

Campbell Soup may seem like a surprising stock on this list. It’s most likely here on speculation that demand for its products could vanish in the coming years.

In 2007, their main soup business was 51 percent market share; it is now at 46 percent. The millennials, the 80 million Americans between the ages of 18 and 34, are losing interest in the traditional canned soup market.

In September, the company said it was closing two U.S. plants and cutting 700 jobs due to declining soup demand.

Yet, the company has been trying to save itself: In reaction to learning that the millennials were eating more diverse foods and to favor mobility, Campbells launched the Go Soups: smaller portioned soups and mini meals in more varied and ethnic flavors.

But there’s also the issue of the economy. Budget conscious consumers may likely opt for cheaper, generic soups, while those with ample income might avoid the food category entirely.

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