As someone who watched with intrigue at the sharp rise and fall of steel stocks in 2008, my eyes became further enamored by the trade lately of U.S. Steel (X) - a stock that has severely underperformed this year, but one that has managed through all the negative headlines and downgrades to stay above its last and most important level of support.
The stock's fall to $19 has not been good for investors, but it hasn't been quite the gruesome scene others in the sector have been forced to suffer through. The overall bloodbath in the sector is perhaps best defined by the trade of AK Steel (AKS). As shares suffer through new lows that mask the company as nothing more than a penny stock, it's important to note that even the sector's safe haven plays have proven quite to the contrary. For example, the offer of a near 4% dividend yield on shares of Nucor (NUE) has failed to keep shares from falling 16% since February.
The reasons for the downward slide have everything to with inconsistent economic growth. Steel stocks, much like homebuilders, can't thrive amidst slowdowns or cutbacks. They need clear economic growth in the present environment along with a near guarantee of such future growth to entice investors. In both instances the economy has failed these companies.
Now there are some positives for the sector, but they remain meager. U.S. Steel, for example, is expected to post positive earnings reports over the next six quarters. Bottom line estimates have the company, however, posting losses the next two quarters. A fact not overlooked by investors and one that should remain with those willing to take up what is still a risky position.
Sometimes, though, such risk is good. When taken with the right frame of mind and appropriate stop loss orders, such risk can provide the greatest returns. If you bought steel stocks in early 2009, you already have experience with the massive returns the sector can provide.
It was then that U.S. Steel found itself mired in one of the greatest share price falls not associated with the banking sector. Down nearly $180 in nine months and reporting first quarter earnings that year of $-3.84, the stock remained one in which many would have avoided. Still, in March of 2009 shares finally found support at $16.66. One year later they would be at $60 before once again falling back due to continued earnings losses and economic circumstances outside the company's control.
For much of the past 12 months, the stock has fought the $20 level. In June, shares even hit a low of $17.67. Again, investors toyed with and challenged the stock's strongest support level. Still, shares held even in the face of concerns surrounding Europe and continued questions surrounding our own economy's growth.
For months I held a negative view on the company's shares. I wanted to see if they could hold that infamous support level. A level that looked particularly fragile heading into the midyear swoon after the stock had lost half its value the summer before. Now I find myself both surprised and encouraged. Shares are still not for the risk averse, but for those willing to both implement and use a stop loss order at $16, they might just pay off.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.