Don't Expect A Short-Term Pop In AK Steel

Nov.14.12 | About: AK Steel (AKS)

A stern warning by management at AK Steel (NYSE:AKS) that the company would experience greater-than-expected earnings weakness left shares free falling on Tuesday, Nov. 13. The company now expects to post a fourth-quarter loss between $0.67 and $0.72, well below the initial forecast of a $0.19 loss.

The company placed blame for the disturbing forecast on a decline in selling price, which is expected to drop 5% from the $1,073 per ton reported in the third quarter. Management also announced an expected offering of 25 million common shares in an attempt to pay credit expenses. By the end of the day, shares had fallen well over 17% and succumbed to an intraday low of $4.39, which the stock had not seen since June 2004.

Now, shares did recover over 2% in the final minutes of trading to close at $4.50 -- above the previous low of $4.44 the stock had touched in late July. The ultimate reason for the brief turnaround was that shares now sit directly on their last level of defined support. As a result, some traders may be tempted to take up a position believing the stock can only go up from here. However, below are three very important reasons to keep from making what may turn out to be a crucial mistake.

  1. Earnings: The fourth-quarter loss AK Steel is now certain to suffer may not scare away every trader. After all, even U.S. Steel (NYSE:X) is projected to report a loss for the current quarter. However, it's what the future holds for this company that makes buying shares even more unsettling. While U.S. Steel is projected to post solid earnings growth in 2013 with bottom-line estimates only calling for a possible first-quarter loss, AK Steel has the potential to post a loss in all four quarters next year. In comparison to the projected 2013 earnings of other steel stocks -- including Nucor (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD), which are also expected to stay well above water -- AK Steel lags and lags badly.
  2. Lack of Defined Support: AK Steel may have been able to bounce back above its previous 52-week low of $4.44 by the end of trading, but shares still sit dangerously close to uncharted territory. The last time shares were at this level they were bouncing back from an all-time low of $1.74 hit in September 2003. Maybe such a comparison is inappropriate in this instance, but it must be at least recognized because if shares drop any further, they will be faced with the lack of a clear support line.
  3. Sector Performance: Of all the major steel stocks, AK Steel is the only one trading below its 2009 lows. This underperforming trend has been consistent for shares since June and will more than likely continue until the company can assure investors the steel giant is at least able to keep pace with others in the industry.

For now shares may hold support, which sits directly beneath them. However, the chances they fall further are just as ominous, which makes this an investment too risky for most. With Nucor, U.S. Steel, and Steel Dynamics providing much more in the way of guarantees via dividends and earnings, AK Steel has the potential to be left with little investor interest.

For those still willing to open a position in AK Steel, tight stop-loss orders at around $4.35 should be considered paramount.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in X over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.