Why a Steel Surge Could Be Huge For These 3 Stocks

Alcoa Inc (NYSE:AA), Cliffs Natural Resources Inc (NYSE:CLF), and United States Steel Corporation (NYSE:X) have the potential to extend today's rally, from a contrarian viewpoint

by Josh Selway

Published on Dec 23, 2015 at 12:17 PM
Updated on Jun 24, 2020 at 10:16 AM

Steel prices are on the rise today, thanks to a report out of China that the country has made cutting excess steel capacity a priority in the coming years. Many metals stocks are now moving higher and, given their pessimistic sentiment backdrops, could present contrarian opportunities. Below, we'll take a closer look at three such names: Alcoa Inc (NYSE:AA)Cliffs Natural Resources Inc (NYSE:CLF), and United States Steel Corporation (NYSE:X)

Starting with AA, the stock has added 6.5% at $10.18 today. Longer term, the shares have dropped nearly 36% on a year-to-date basis. As such, it's not surprising to note that just over half of the analysts covering the stock say it's a "hold" or "strong sell" -- although Barron's has some high expectations

Option traders have also shown pessimistic tendencies. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), AA sports a 50-day put/call volume ratio of 0.80, which is just 10 percentage points from an annual high. What's more, Alcoa Inc's Schaeffer's put/call open interest ratio (SOIR) of 0.94 outranks 92% of similar marks from the past 12 months. Add it all up and this shows there's been an unusual interest in AA puts over calls. 

As for CLF, the commodity stock is up 11.3% at $1.77. However, the shares are still down 75% in 2015, and only one of the 13 covering brokerage firms rate them anything higher than a "hold." 

Meanwhile, put players have been all over the underperformer. CLF's 10-put put/call volume ratio at the ISE, CBOE, and PHLX stands at 1.84, meaning almost two puts have been bought to open for every call during the past two weeks. This ratio also tops 92% of readings from the past 12 months. And Cliffs Natural Resources Inc's SOIR shows a similarly bearish setup. At 1.15, this reading outranks three-fourths of all others, going back one year. 

Finally, has actually pared its early gains, last seen down 1% at $9.01. Meanwhile, on a relative-strength basis, the shares have underperformed the S&P 500 Index (SPX) by 19.5 percentage points during the past three months. As a result, only 31% of analysts recommend buying the steel stock

Option bears have ramped up their betting in recent weeks, as well. X's 10-day put/call volume ratio across the three major exchanges comes in at 2.24, sitting just 8 percentage points from an annual peak. Also, on an absolute basis, United States Steel Corporation's short-term option traders are more put-heavy than either of the above stocks, per its SOIR of 1.69. 

In summary, it may be too early to give a decisive vote of confidence to the aforementioned commodity names. However, if steel makes a prolonged comeback, a capitulation among bearish analysts and/or put buyers could send the stocks sharply higher.

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