Although the end of 2013 was a pretty rough time for most of the commodities complex, there were a few names which actually came to life at the end. Most of these names were already beaten down earlier in the year and some had been on losing streaks dating back years.
After reviewing some of these names and the general economy over the holidays, we think that we have some insight and moves which would benefit readers.
Chart of the Day:
Our call on US Steel and AK Steel has been spot on. US Steel has been a long-term out performer versus AK Steel, but as it traded in tandem with its more volatile peer for most of 2013 we waited for the move. In December that happened and now we are adjusting our positioning, just as we said we would do all along. We would prefer to do buying on pullbacks however.
Source: Yahoo Finance
Commodity prices this morning are as follows:
- Gold: $1,224.40/ounce, up by $22.10/ounce
- Silver: $20.12/ounce, up by $0.75/ounce
- Oil: $96.42/barrel, down by $2.00/barrel
- RBOB Gas: $2.735/gallon, down by $0.0509/gallon
- Natural Gas: $4.30/MMbtu, up by $0.07/MMbtu
- Copper: $3.386/pound, down by $0.0105/pound
- Platinum: $1,405.50/ounce, up by $31.70/ounce
We have long been bullish of US Steel (X) while being either bearish or neutral on shares of AK Steel (AKS). Our position has always been that we were willing to risk the big initial returns in AK Steel in order to have the steady gains of US Steel and have capital allocated to a name with far less risk in the early innings of the recovery for the industry. Readers who have stuck to this logic have benefited with the short on AK Steel but in recent months have missed out on the upward movement in shares as our opinion has been to be neutral until a confirmed move was made.
With the latest moves in share prices, and the upgrade this morning of US Steel, we think that readers could start rotating a portion - a small portion - of their US Steel position into AK Steel. There is still considerable risk, but with the macro news and changing economic winds in Japan and possibly China it appears to us that the industry is poised to see all boats rise with the rising tide.
For truly conservative readers, one might find Nucor (NUE) a more interesting target than AK Steel as the company pays a solid dividend and is one of the better run names out there. When the economy is doing good the management team's abilities are less apparent but nevertheless still important.
This chart does not even tell the entire story, but it has been a long time since investors could be excited about the prospects presented by Molycorp.
Source: Yahoo Finance
Whereas we buy into the turnaround in the steel names and analysts calling for improved results, we find it much harder to get that excited for the rare earth names, especially Molycorp (MCP) which has seen renewed interest in recent weeks. This morning the company received an increased price target from DA Davidson, which now believes Molycorp shares could hit $8/share. That is an absurdly bullish call, especially when one considers the issues still facing the company with their own production, not to mention the weak pricing power for rare earth producers right now. We continue to think that investors looking to invest in smaller producers should look elsewhere because the rare earth names still have a number of headwinds they are facing.