The steel sector has come on strong in 2009, and the group could gain additional momentum in the wake of this morning's upgrade at Goldman Sachs. Specifically, the brokerage firm lifted its rating on U.S. steel makers to "attractive" from "neutral." The brokerage firm cited the sector's underperformance and the emergence of "incrementally positive data points." Goldman also said, "Steel and scrap prices in the U.S. have bottomed in our view, Chinese prices are rising, inventories remain low, a weak dollar has brought the U.S. close to being a net exporter, and we expect better industrial and auto demand in 2010." It added U.S. Steel (X) to its "conviction buy" list, and said its favorite stocks are Steel Dynamics (STLD), AK Steel (AKS), and Nucor (NUE).
Technically speaking, it's about time the analyst community took notice. The Market Vector Steel (SLX: sentiment, chart, options) exchange-traded fund (ETF) has soared more than 89% on a year-to-date basis, easily besting the S&P 500 Index's (SPX) gain of about 20% for the same period. What's more, SLX has outperformed the SPX by nearly 10% on a relative-strength basis during the prior 40 trading days.
Overall, the brokerage bunch has lagged in its coverage of the steel sector. Among Wall Street analysts, more than half of the 104 ratings on steel stocks are "holds" or worse. If more analysts follow Goldman Sachs' lead, we could see additional upgrades send the group steadily higher. Meanwhile, short interest on the SLX jumped by more than 32% during the most recent reporting period. As SLX continues its run higher, these bears could be forced into abandoning their losing positions, thus resulting in additional fuel for the rally.
United States Steel Corp.
United States Steel Corp. (X: sentiment, chart, options) is the nation's No. 2 integrated steel maker (behind Mittal Steel USA), according to Hoover's. The company makes sheet and semifinished steel, tubular and plate steel, and tin products, and produces about 25 million tons of raw steel annually. U.S. Steel's customers are primarily in the automotive, construction, chemical, and steel service center industries.
As part of its positive review of the steel sector, Goldman Sachs added X to its "conviction buy" list. Following the note, X spiked more than 3% higher, extending the stock's rebound from support at its rising 50-week moving average. The bounce higher has placed X back above key support at its 10-week and 20-week moving averages. These trendlines have helped usher X steadily higher since early April. Currently, the shares have moved into contention with short-term resistance in the 45 area. This region has held X in check since early October.
That said, a breakout above the 45 region could prompt more analysts to follow Goldman's lead. And, according to data from Zacks, there is plenty of room for upgrades, as eight of the 10 analysts following X rate the shares a "hold" or worse. Additionally, the security is trading at a premium to the consensus 12-month price target of $42 per share. Any upgrades or price-target increases could provide X with a steady tailwind of buying pressure.
There is also room for improvement in X's sentiment outside the brokerage community. Specifically, short interest accounts for more than 17% of the stock's total float. But these bears may already be on the ropes, as the number of X shares sold short plunged by more than 7% during the most recent reporting period. A continuation of this short-covering trend should provide additional lift for X.
Finally, options traders are relatively complacent toward the security, with X's Schaeffer's put/call open interest ratio (SOIR) of 0.88 arriving just below the midpoint of its annual range. Call buying is on the rise, however, as data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) indicate that nearly 1.5 calls have been bought to open for every one put purchased during the prior two weeks. What's more, this ratio is up from its Nov. 18 low of 1.09, hinting that call buying is gaining momentum on X, a development that could create additional lift for the shares.
Traders looking to take advantage of an unraveling of the bearish sentiment toward X should consider the stock's January 2010 42 call.
AK Steel Holding Corp.
AK Steel Holding Corp. (AKS: sentiment, chart, options) was also mentioned in Goldman's note earlier this morning, with the brokerage firm listing AKS as one of its favorites in the steel sector. Technically speaking, the shares have responded by rallying 1.5%, reclaiming former support at their 20-week moving average in the process. This intermediate-term trendline, in conjunction with its 10-week counterpart, had helped AKS rally from its March lows until the shares rolled over in mid-September.
But, AKS' short-term pullback was halted at support near the 15 level and the stock's rising 50-week moving average. The stock is now poised to reclaim round-number support at the 20 level. A move past this technical hurdle could be a sign that AKS' rally is far from abating.
From a sentiment perspective, AKS has plenty of sideline money available that could further extend the stock's uptrend. Starting with options traders, puts are quite popular, with the equity's SOIR of 0.91 arriving higher than 81% of those taken during the past year. Furthermore, AKS' ISE/CBOE 10-day put/call volume ratio of 0.64 arrives in the upper quarter of its annual range, pointing toward heavy pessimism from these speculative investors.
Wall Street is also bearish on AKS. According to data from Zacks, six of the 11 analysts following the shares rate them a "hold" or worse. Any upgrades from this group could increase buying pressure on the security. Traders looking to take advantage of an extended rally from AKS should consider a January 2010 19 call.
Steel Dynamics Inc.
One final steel stock for consideration is Steel Dynamics Inc. (STLD: sentiment, chart, options)