Anyone selling short U.S. Steel (X) at this point is obviously taking a position against the Wall Street crowd which very recently upgraded company share price to the range $66 to $90, different targets given by several Wall Street analysts from Goldman Sachs, Bank of America, Deutsche Bank and KeyBanc Capital.
What is interesting to analyze is the fact most of these analysts had Sell ratings on the stock during the stock market bottom back in 2009. Furthermore, notice the fact all of them maintained buy ratings on this company during the stock market crash of 2008.
The most recent upgrade came from Deutsche Bank, however the last time this analyst told people to buy U.S. Steel, the stock wound up underperforming the S&P by a whopping 22 percentage points.
We believe there are compelling reasons to consider the crowd will be wrong once again.
1. Horrible balance sheet, one of the worst in the industry.
2. A cash-burning cash flow statement.
3. Trading around 55 times what analysts expect this company to earn next year.
Beyond Trading had a Strong Buy rating in U.S. Steel back in 2009 when shares of this company traded in the range $18-20 however today we are forced to give it a Sell rating for obvious reasons.
We understand if you buy a company such as Arcelor Mittal (MT) on weakness, however anyone buying U.S. Steel at these lofty prices is merely playing the momentum created by the crowd in Wall Street. That’s fine if you decide to follow the crowd, however, please make sure you take the necessary measures to guarantee a profitable trade before all of them decide to dump shares on the market.
It is our view given the recent gains in U.S. Steel share price, that it is prudent to take profits selling them on strength using the momentum reversing to the short side. We believe a short position in the range $65 to $71 would offer you a compelling advantage instead of following the crowd.
One might argue a bottom has taken place in the steel industry, therefore, the trend hereafter will be positive based on fundamental data, i.e. higher prices for steel justify a higher multiple for U.S. Steel.
We strongly disagree with the current bullish argument for three major reasons:
- Firstly, the bottom in U.S. Steel was coincident with a stock market bottom back in March 2009, i.e. if market corrects, U.S. Steel share price will likely follow.
- Secondly, this industry is cyclical; what today is good tomorrow may not be so good. Do not try to predict stock prices on the long term.
- Finally, you do not have a strong and sustained trend without jobs, and this factor is critical. We do not expect a sustained strong trend in job creation in the United States for some years.
It is certainly possible you may have some residual upside left in U.S. Steel due to present sentiment which is very bullish. It can be easily perceived from momentum indicators, however, to upgrade a stock following a 300% rally seems quite exaggerated, especially having in mind factual data and U.S. Steel's horrible balance sheet, you’re making a huge bet on an unknown future.
Author's Disclosure: the company does not have a position on the stock. Beyond Trading Corporation, has a Sell rating on shares of U.S. Steel recommending to sell short in range $65-71
