U.S. Steel Has Significant Rebound Potential

Summary

• Economically sensitive equities have generally not participated in the record U.S. stock market rally, as the lower for longer narrative has been almost universally accepted.
• A capital rotation is long overdue.
• Valuations and balance sheets are better today than late 2015/early 2016 in many out-of-favor, economically sensitive equities, including U.S. Steel, which has significant rebound potential.
• This idea was discussed in more depth with members of my private investing community, The Contrarian. Get started today »

"A 60:40 allocation to passive long-only equities and bonds has been a great proposition for the last 35 years... We are profoundly worried that this could be a risky allocation over the next 10."

- Sanford C. Bernstein & Company Analysts (January 2017)

"Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria"

- Sir John Templeton

"Life and investing are long ballgames."

- Julian Robertson

Introduction

On December 17th, 2015, I published an article in my Too Cheap To Ignore series, titled, "U.S. Steel: Too Cheap To Ignore", focusing on the rebound potential in U.S. Steel (NYSE:X) shares, which closed trading on December 15th, 2015 at $8.48.

At the time of the article's publication, U.S. Steel shares had declined from highs of roughly $44 per share in 2014, as both U.S. and global economic growth underperformed expectations. This shortfall in growth versus expectations torpedoed the shares of economically sensitive equities, particularly commodity equities, with nosedive declines occurring in 2015 into early 2016.

Looking back, this represented a tremendous buying opportunity, with early 2016 marking a bottom in global growth expectations, as central banks embarked on a stimulus path. U.S. Steel shares went on to have gains of more than six times from their lows.

Does this backdrop sound familiar?

Building on the narrative, U.S. Steel shares have declined from highs above $45 per share in early 2018 all the way to below $14 today, with X shares bouncing from their recent lows under $12 per share.

This incipient rebound in U.S. Steel shares could be just getting started, as a capital rotation to economically sensitive equities is long overdue.

Investment Thesis

Economically sensitive equities are seeing a replay of late 2015/early 2016, as a majority of market participants anticipate an economic slowdown, when a

Analyst’s Disclosure:I am/we are long X, CLF, FCX, AND SHORT TLT VIA PUT OPTIONS AND SHORT SPY AS A MARKET HEDGE IN A LONG/SHORT PORTFOLIO. 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.

Every investor's situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.