Why U.S. Steel Fell, And What to Do About It Now

Jan.27.10 | About: United States (X)

Tuesday U.S. Steel (NYSE:X) reported a loss of 267 million dollars for Q4 of 2009. The $1.65 per share loss was 22 cents below analysts expectations of a loss of $1.44. The big surprise is that U.S. Steel is forecasting a similar loss for Q1 of 2010. The projected loss would be the 5th straight loss for U.S. Steel. The stock has been pummeled, dropping over 10% to $50.50 per share Tuesday. I listed U.S. Steel in a post last week as one of three stocks that investors should consider selling. I believed that U.S. Steel’s stock valuation was too rich when shares were trading over $65 last week. I received a lot of emails from individuals who said that I was crazy and that the steel giant was only headed upward. Over the past week U.S. Steel has lost 23% of its value and I don’t believe shares have totally bottomed out.

Why did I think U.S. Steel was overvalued? The stock was priced for perfection. Analysts were all over television screens telling investors to buy U.S. Steel despite its hefty PE ratio. Merrill Lynch and Deutsche Bank were adding U.S. Steel to their buy lists when the stock was trading at its 52 week high. The stock was priced for a robust economic recovery, rising steel prices and lower raw material costs. It was obvious that any negative news was going to punish the stock badly.

So what do I expect now? I expect brokerage firms to change their opinions and place U.S. Steel on their sell lists. The stock is a screaming buy in the upper 20’s but I doubt it will ever get that low. I would actually look at buying shares of U.S. Steel in the high 30’s to mid 40’s now that expectations have been tempered.

Disclosure: No position in U.S. Steel