Check out my latest Danger Zone interview with Chuck Jaffe of MarketWatch.com.
Some stocks are more dangerous than others. In an anemic economic environment, the most dangerous stocks are those with issues that are lurking behind the scenes or in footnotes. Too often, investors are willing to invest without much diligence when times are good. But when times get tough, more are willing to roll up their sleeves and do some old-fashioned analysis.
US Steel (X) is an example of a stock that could see significant additional downward pressure as more investors become aware of the $5.2 billion in liabilities related to its "Pension Benefits", "Other Benefits" and "Other postemployment benefits" plans, which I will bundle under the term "pensions" for the remainder of this article.
A loophole in GAAP accounting minimizes, at least temporarily, the impact of big pension liabilities on reported earnings. Eventually, however, these issues can hurt earnings and surprise investors if the company does not take measures to get them under control.
In a challenging economic environment, taking appropriate measures is not always feasible. As Warren Buffett famously said, "when the water is drained out of the pool, you see who is not wearing trunks".
My fear is that US Steel's pension liabilities will eventually manifest in downward earnings revisions that will drive the stock down.
Disclosure: I am short X.