Why I Am Buying AK Steel

| About: AK Steel (AKS)

The first rule of investing is this: If you would be proud to tell your friends what investment you just bought with $100,000 in your retirement account, it's highly unlikely it will outperform a simple index of the market.

In my forty years of experience, for equity investments to be able to double or triple, they need to have a certain odor about the industry or the industry segment. Investments to be undervalued need to be misunderstood.

This is the chart of AK Steel Holding (NYSE:AKS). Only a mother could love such a chart.

Chart forAK Steel Holding Corporation (<a href=

AKS has three core markets. The first, is quality auto steel that depends on levels of production in the auto and truck industry. The second is high quality stainless steel used in appliance manufacture and depends on home prices and new home starts. And the third, is GOES steel which has magnetic properties that allow it to be used in the manufacture of generators and electrical transmission applications and is dependent on the level of upgrading in the electrical transmission industry.

If you believe the world is going to hell in a handbasket, you don't want to buy this stock. I think the handbasket carried the head after the sentence was carried out during the French revolution.

But if, instead, you believe that we are not only in a typical business cycle, but a business cycle which is going to run much longer than normal because of suppressed energy pricing, this is the horse.

A look at the historical price data on the major steel stocks indicates that every ten years an 18 month window opens where profits soar and the prices of the stocks significantly outperform the market indexes.

This company is basically breaking even, but a lot of the underlying problems of this industry have been dealt with. This particular company, but also the entire industry is going to be a major beneficiary of suppressed energy costs. This particular company has also positioned itself in the metallurgical coal business and iron ore processing. In the past, price increases in steel have been merely pass-throughs of rising input costs consisting of mainly iron ore and metallurgical coal.

This is a company and this industry segment, with their huge fixed costs, that can really move earnings during the right environment. That right environment is price increases. Sometime in the next 12 months analysts will begin to focus on 2015 earnings and this stock could go into overdrive.

I think the historical data, over the last 50 years, on interest rates, money supply growth and the yield curve would indicate we are going to have another strong stock market for the next 18 months and increasing auto sales above expectations.

The recent temporary closing of a blast furnace at AK Steel (the old Aramco Steel) contributed to a 5 million ton loss of capacity to North American Steel Capacity. This is behind the recent steel price increases. That decrease in supply represents only 4% of North American capacity.

If demand rises by 4% it will have the same effect on steel pricing. Just this week steelmakers filed a trade complaint on imported steel used in oil production. This is a shot across the bow of foreign steel makers who are subsidized by the entire economic system of their countries so they can produce steel at artificially low prices. These low prices create a competitive edge in the global manufactured goods trade. When the demand for steel strengthens these complaints restrict the ability of foreign producers to dump subsidized steel into our market.

Go to the company's web site, aksteel.com, and read the May 7, 2013 investor presentation. Their headquarters is in Westchester, Ohio. Where is that?

Oh, did I tell you that 32% of the float is sold short? Oh, I love that.

I know we are in the summer doldrums and this stock could be subject to a lot of tax loss selling in the fall, but I don't want to take a chance of missing the right moment. I think this is the industry and this is the stock.

FRI CLOSE 2013.07.05: $3.02

S&P 500: 1631.89

Disclosure: I am long AKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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