2 Red-Hot Steel Stocks With Room to Run

Underloved AK Steel Holding Corporation (AKS) and United States Steel Corporation (X) could continue to outperform

Dec 28, 2016 at 2:56 PM
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Every week, Schaeffer's Senior Quantitative Analyst Rocky White creates an internal Sector Scorecard to compare the performance of major stock sectors, ranking each in order of their bullish contrarian setup. Put simply, he ranks sectors highest that have a strong technical backdrop along with negative sentiment from analysts and traders. Coming in at the fourth spot this week is the "Metals Non-Ferrous" sector, which has been outperforming for months. In fact, the corresponding SPDR S&P Metals and Mining ETF (XME) has added roughly 108% year-to-date, and tapped a two-year high in early December.

Drilling down further, 77% of the stocks in this sector are currently trading above their 80-day moving averages, and the 13 components we track have averaged a gain of 98.3% in 2016 -- second only to the average year-to-date gain for gold stocks. Among the specific names that have turned in huge rallies this year are steel stocks AK Steel Holding Corporation (NYSE:AKS) and United States Steel Corporation (NYSE:X) -- which also happen to be the two largest holding of XME.

AKS has tacked on a whopping 371% so far this year, and tapped a two-year high earlier this month, though the shares were last seen down 1.8% at $10.55, slumping with the broader market. Over the past three months, the stock has outperformed the S&P 500 Index (SPX) by nearly 107 percentage points.

On the sentiment side, there's still quite a bit of pessimism being levied toward AKS. Two-thirds of the brokerages tracking the stock maintain a rating of "hold" or "strong sell," meaning future upgrades could give the shares a lift. Plus, short interest represents more than 20% of the equity's available float, setting up a potential short-squeeze situation.

In the options pits, speculators have favored AKS calls on an absolute basis -- but to a lesser degree than usual. In fact, the stock's 50-day put/call volume ratio of 0.45 across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks in the bearishly skewed 82nd percentile of its annual range.

Now looks like a prime time to scoop up AKS' near-term options, too. The stock's Schaeffer's Volatility Index (SVI) of 57% is docked at a 12-month low, indicating historically low volatility expectations are being priced in. Meanwhile, AK Steel Holding Corporation (NYSE:AKS) has a Schaeffer's Volatility Scorecard of 97 -- meaning the options market has drastically underpriced the stock's ability to make big moves over the past year.

Turning our attention to X, the shares are off 3.1% today at $35.15, but still sitting on a 340% year-to-date lead. Since pulling back from its early December two-year high, the stock has found support in the form of the 20-day moving average.

Short sellers have been hitting the exits lately, with these pessimistic positions dropping by 23.6% during the two most recent reporting periods. But 12.5% of X's available float is still sold short, representing buying power left waiting on the sidelines. Adding to this bearish backdrop, nine out of 13 analysts currently rate the equity a "hold" or worse, leaving plenty of room for upgrades. Speaking of which, Morgan Stanley -- which had previously expressed its high expectations for the stock -- today named U.S. Steel to its list of stocks to buy in 2017.

In the options arena, traders have been unusually put-heavy in recent weeks, per X's 10-day put/call volume ratio of 1.09 at the ISE, CBOE, and PHLX -- near the top third of all readings from the past 12 months. But given the stock's recent performance on the charts, it's possible some of the put buying may have come at the hands of shareholders looking to protect their profits.

In any case, it's an attractive time to strike on the stock's short-term options. United States Steel Corporation (NYSE:X) has an SVI of 54% -- just 2 percentage points from an annual low -- while its SVS is parked at 99. Simply stated, near-term options buyers could be getting an unusually good bargain on X.

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