Steel Stocks to Buy
With the volatility increasing in the markets more and more during the past few months, many traders are having an absolute field-day playing individual stocks that sit in sectors with 3-4-5+ point moves on a daily basis. One sector that offers many stock reports regarding this type of price-action is the Iron and Steel stocks.
Many consumers may not be aware but my guess is that a good chunk of traders are savvy enough to realize domestic steel prices are up more than 30% since late 2010! Although this has not helped United States Steel (NYSE:X) shares which are down 20% this year to $45.50 and trade for a fraction of their 2008 peak of $191.
There are droves of astute bullish investors that have been getting excited by the seemingly disconnect between steel prices and U.S. Steel stock (also known as “Letter X” on many trading desks), calling it an opportunity to buy up one of the better-positioned global steel makers.
The divergence has occurred because investors are more concerned about the current direction of steel stock prices than the absolute level itself. Stock reports have shown domestic hot-rolled prices stood at $600 per ton around last Thanksgiving, then hit $900 in April and now currently sitting in the neighborhood of $825.
So while steel stock prices are up nicely from the start of 2011, they are down from the early April high, and investors fear further declines due to potential weakening in global demand.
After dissecting several stock reports on U.S.Steel, shares don’t look cheap, trading for 18 times projected 2011 profits of $2.53….But they are more reasonable based on estimated 2012 profits of $5.45 and that could be conservative.
Assuming steady steel prices, U.S. Steel could earn $7 to $8 a share next year. JP Morgan steel analyst, Michael Gambardella currently has a price target of $76 which is about 65% higher than recent levels as well as an overweight rating on the stock. An improving U.S. economy has supported steel prices this year.
So being nervous about the direction of steel stock prices, stock reports have swayed investors to steer clear of Andrew Carnegie’s industrial creation. That could be a BIG mistake. When it was formed in 1901 by a group including Andrew Carnegie and JP Morgan, U.S. Steel was the worlds largest industrial company.
It’s now just the 11th largest steel maker worldwide, with projected 2011 production of 24 million metric tons. That’s 2% of global output. China produces and consumes half of the world’s steel.
U.S. Steel differs from other big publicly traded domestic steel company Nucor (NYSE:NUE), whose “mini-mills” mainly use scrap as an input.
One of U.S. Steel’s strengths is that its domestic steel operations are almost self-sufficient in iron ore, giving the company a cost advantage over rivals beholden to the iron producers such as Vale S.A. American Depositary (NYSE:VALE), BHP Biliton: (NYSE:BHP) and Cliffs Natural Resources (NYSE:CLF) which all have been sharply boosting price tags.
After further due diligence in other stock reports we had found out that “Letter X” produces iron ore for less than $100 ton, way below the Shanghai spot price of $180. It’s reserves should sustain over 30 years of production! Those are staggering numbers if I may say so myself.
U.S Steel views itself as a survivor in a consolidating business that has watched the rise of Archelor Mittal (NYSE:MT) which now has 8% of global output. With an attractive business mix and better steel prices let alone iron ore price tags that can not be beat domestically…U.S.Steel stock could reap tremendous profits in the years to come.
Speculating just a bit, it could become the target of a takeover if the results continue to disappoint. One way or the other, “Letter X” seems like a Win/Win situation for investors going forward.
This is your Captain….Signing off for now & enjoy the flight!