2 Steel Stocks With Room to Run

AK Steel Holding Corporation (AKS) and United Stales Steel Corporation (X) are rallying in the face of bearish sentiment

Mar 2, 2016 at 3:29 PM
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Steel stocks are booming today, on news that the U.S. Commerce Department's preliminary findings in an international probe found several companies in violation of anti-dumping laws, leading to heavily increased tariffs on imported cold-rolled steel from seven countries. AK Steel Holding Corporation (NYSE:AKS) and United States Steel Corporation (NYSE:X) are both sharply higher on the news, and both could stand to benefit from a shift in the bearish sentiment that has plagued them recently.

AKS
spent the latter half of 2015 and most of January 2016 moving lower on the charts, hitting a record low of $1.64 on Jan. 20. The stock has been on the mend since then, and today is enjoying a 19.7% surge to $3.51 -- and earlier hit a seven-month high at $3.56. In fact, AKS is on pace to topple its 50-week moving average for the first time since November 2014.

But from a contrarian standpoint, AKS still has plenty of potential to keep its momentum going.
 Ten of the 12 analysts following AKS still rate it a "hold" or worse, and the average 12-month price target on the equity sits at $2.30 -- a discount to current levels. Should analysts issue upgrades or price-target hikes, the shares could easily see more upside.

Sentiment outside of the analyst community hasn't been looking much better. Short interest on AKS still accounts for more than 23% of its available float. At the stock's typical pace of trading, it would take eight days to cover all these bearish positions -- meaning there is plenty of buying power on the sidelines to keep the rally going.

Looking to the options pits, traders today are ramping up their preference for bullish bets, with calls changing hands at 15 times their usual intraday clip, outnumbering puts more than 7-to-1. In fact, the put/call volume ratio of 0.14 is in just the 15th percentile of its annual range, pointing to a much healthier-than-usual appetite for AK Steel Holding Corporation (NYSE:AKS) calls.

X is also soaring today, up 24.2% to $11.41, and on pace to end atop its 10- and 20-week trendlines for the first time since May. X is now ahead by 43% year-to-date, despite hitting an all-time low of $6.15 at the end of January, just after its quarterly earnings release. And like AKS, the stock could benefit from an unwinding of skepticism.

Eighty-five percent of brokerage firms rate the stock a "hold" or worse. Nearly 37% of X's total float is currently tied up in short interest, accounting for more than six days' worth of trading, at the stock's average volume.

And option traders have been no kinder. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 50-day put/call volume ratio of 2.01 is higher than 92% of all readings taken in the past year. Echoing this, X has a Schaeffer's put/call open interest ratio (SOIR) of 2.73 -- in the 97th percentile of its annual range -- indicating an extreme preference for puts among short-term traders.

That said, today is a different story. X calls are crossing the tape at four times their typical intraday pace today, with possible buy-to-open action spotted at the April 12 call. Should option bears abandon ship in light of today's news, United States Steel Corporation (NYSE:X) may only be getting warmed up.

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