United States Steel Corp: A Lower Entry Price Or An Extra 17.9% In Gains

| About: United States (X)

The steel sector has taken quite a beating, and it could make for a good contrarian play at this point in time. However, you should be bullish on the United States Steel Corp before you consider deploying any money into this play. If you are not bullish or are not convinced that the stock is going to rally from these levels, then it would best to avoid putting this strategy into play.

An investor usually sells a put option if his/her outlook on the underlying security is bullish. The buyer of the put option pays the seller a premium for the right to sell the shares at an agreed-upon price. If the stock does not trade at or below the agreed-upon price (strike price), the seller gets to keep the premium.

Benefits associated with selling puts

  1. It allows one to generate income in a neutral or rising market.
  2. Acquiring stocks via short puts is a widely used strategy by many retail traders and is considered to be one of the most conservative option strategies. This strategy is very similar to the covered call strategy.
  3. The safest option is to make sure the put is "cash secured." This simply means that you have enough cash in the account to purchase that specific stock if it trades below the strike price. Your final price would be a tad bit lower when you add the premium you were paid up front into the equation. For example, if you sold a put at a strike of 20 with two months of time left on it for $2.50; $250 per contract would be deposited in your account.
  4. Most put options expire worthless and time is on your side. Every day you profit via time decay as long as the stock price does not drop significantly. In the event it does drop below the strike you sold the put at; you get to buy a stock you like at the price you wanted. Time decay is the greatest in the front month.

Some reasons to consider United States Steel Corp (NYSE:X):

  • A projected growth rate of 68% for 2013
  • A positive levered cash flow of $25.8 million
  • Percentage short of float is at 26.4%, which makes it a very good candidate for a short squeeze.
  • A cash flow five year average of $8.60
  • Strong institutional presence; percentage Held by Institutions is 78.2%
  • Net income has improved from -$1.4 billion in 2009 to -$53 million in 2011.
  • Cash flow per share has increased from -$5.27 in 2009 to $3.62 in 2011.
  • Sales improved from $11 billion in 2009 to $19.8 billion in 2011.
  • A 3-5 year estimated EPS growth of 8%
  • A decent current ratio of 1.59

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Suggested Put strategy United States Steel Corp :

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The stock is still in a downtrend and it just recently blew past its 2-year lows. We would wait for a test of its 5-years lows in the 16.80- 17.50 ranges before using this strategy.

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The Jan 2013, 17 puts are trading in the 2.33-2.37 ranges. If the stock pulls back to the stated ranges, these puts should rise roughly by $0.70-$1.00. For this example, we will assume that the puts can be sold at $3.05. For each contract sold $305 will be deposited into your account.

If the stock trades below the strike price, the shares could be assigned to your account. Your final cost if the shares are assigned to your account would be $13.95. If the stock does not trade below the strike price, you get to walk away with the premium for a gain of 17.9% in roughly seven months.

Now let's assume that you have a change of heart, and the stock is trading at 14.10, close to your break-even point of 13.95. In this case, you could buy the puts you sold back and then sell new puts and walk away with a gain. For example, you sold these puts for $3.05 and let's assume that now that the stock is trading at 14.10 the puts are going for 5.00. So you buy these puts back, your net loss is 1.95. You could then sell the Jan 2013, 13 puts, for example, for roughly the same price (3.05) you sold the Jan 2013 17 puts and pocket the difference. In this example, the difference works out to $105 per contract (3.05-1.95). Only implement this strategy if you are bullish on this stock otherwise you would be better looking for other plays.

Company: United States Steel Corp :

Levered Free Cash Flow = 25.88M

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Brief Overview

  1. Percentage Held by Insiders = 0.29
  2. Relative Strength 52 weeks = 16
  3. Cash Flow 5-year Average = 8.6
  4. Profit Margin = -0.92%
  5. Operating Margin = 2.34%
  6. Quarterly Revenue Growth = 6.3%
  7. Quarterly Earnings Growth
  8. Operating Cash Flow = 577.00M
  9. Beta = 2.4
  10. Percentage Held by Institutions = 78.2%
  11. Short Percentage of Float = 26.4%

Growth

  1. Net Income ($mil) 12/2011 = -53
  2. Net Income ($mil) 12/2010 = -482
  3. Net Income ($mil) 12/2009 = -1401
  4. Net Income Reported Quarterly ($mil) = -219
  5. EBITDA ($mil) 12/2011 = 898
  6. EBITDA ($mil) 12/2010 = 468
  7. EBITDA ($mil) 12/2009 = -1025
  8. Cash Flow ($/share) 12/2011 = 3.62
  9. Cash Flow ($/share) 12/2010 = 1.75
  10. Cash Flow ($/share) 12/2009 = -5.27
  11. Sales ($mil) 12/2011 = 19884
  12. Sales ($mil) 12/2010 = 17374
  13. Sales ($mil) 12/2009 = 11048
  14. Annual EPS before NRI 12/2007 = 8.74
  15. Annual EPS before NRI 12/2008 = 17.88
  16. Annual EPS before NRI 12/2009 = -10.53
  17. Annual EPS before NRI 12/2010 = -2.83
  18. Annual EPS before NRI 12/2011 = -1.11

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Dividend history

  1. Dividend Yield = 1.10
  2. Dividend Yield 5-Year Average = 1.05
  3. Dividend 5-year Growth = -27%

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 8
  2. ROE 5-Year Average 12/2012 = 5.93
  3. Current Ratio = 1.59
  4. Current Ratio 5-Year Average = 1.85
  5. Quick Ratio = 0.82
  6. Cash Ratio = 0.16
  7. Interest Coverage Quarterly = 0.90

Conclusion

The markets are still in a corrective phase and there is a decent chance that this stock could test its recent lows again before trending higher. A weekly close above 25.00 can be viewed as bullish development. Selling puts is a great strategy for investors looking to get into a stock at a price of their choosing. If the shares are not assigned to your account, you at least get paid for waiting. Once again, only investors who are bullish on the prospects of this company should consider employing this strategy. Investors looking for other ideas might find this article to be of interest Reasons To Be Bullish On Kodiak Oil & Gas

EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Options tables sourced from money.msn.com. Earnings, revenue and growth estimate charts sourced from dailyfinance.com.

Disclosure:

I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware