Q2 STOCKS TO BUY

2 Climbing Steel Stocks with Room to Run

Steel stocks United States Steel Corporation (NYSE:X) and AK Steel Holding Corporation (NYSE:AKS) are trekking higher today, but still have room to run with an unwinding of bearish sentiment

May 26, 2016 at 1:28 PM
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Domestic steel stocks are gaining ground today, as iron ore prices climb, and global producers -- particularly China -- face a fresh round of increased tariffs. Among the stocks adding to impressive 2016 gains are United States Steel Corporation (NYSE:X) and AK Steel Holding Corporation (NYSE:AKS) -- and both could have more room to run.

X is up 2.6% at $14.65, bringing its year-to-date lead to 83.6%. What's more, the shares have broken out above short-term resistance at their 80-day moving average -- a trendline that ushered X lower from June through late February. However, the stock's current trading price is still 45.6% shy of last summer's annual high of $26.95.

The analyst community has yet to change its bearish stance on X, with 12 out of 14 brokerage firms rating the stock a "hold" or worse. And short interest, though down more than 7% during the most recent two-week reporting period, represents one-fourth of X's available float. Should more short sellers hit the exits, or analysts begin to raise their outlooks, the shares could see further gains.

In the options pits, the sentiment picture looks similarly downbeat. Over the past 10 weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASADQ OMX PHLX (PHLX), traders have bought 1.75 X puts for each call. The resulting put/call volume ratio ranks higher than 83% of the past year's ratings, indicating a capitulation of option bears could also create tailwinds for United States Steel Corporation.

Meanwhile, AKS is 3% higher at $4.09, now up 82.6% in 2016. The shares hit a year-to-date high above $5 in mid-April, and their pullback from that level was contained by their 100-day moving average. The brokerage bunch remains hesitant, however, with 85% sitting on a "hold" or worse recommendation, and an average 12-month price-target that falls right near current trading levels, at $4.18

Short sellers, though, have been heading for the exits lately. These bearish bets dropped by about 17% during the two most recent reporting periods, but almost 20% of AKS's available float remains tied up in short interest.

Sentiment also appears to be shifting among options traders. Specifically, AKS' 10-day call/put volume ratio on the ISE, CBOE, and PHLX sits at a hefty 25.98 -- meaning long calls on the stock outnumber long puts roughly 26-to-1 over the last two weeks. Moreover, this ratio sits above 86% of all readings taken in the past 12 months. With AK Steel Holding Corporation 29% below its annual high of $5.77, an unwinding of bearish sentiment outside of the options pits could send the shares climbing higher.

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