Steel Stock Earns "Buy" Rating Despite Sector Headwinds

AKS stock is trading higher thanks to the bull note

Sep 7, 2018 at 10:30 AM
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Steel stocks have underperformed in 2018, but AK Steel Holding Corporation (NYSE:AKS) just received an upgrade to "buy" from "underperform" at BofA-Merrill Lynch, which moved its price target up to $6 from $5 -- a nearly 40% premium to current levels, with AKS last seen up 2.1% at $4.32. The bull note discussed potential benefits from the company's sheet business in 2019 due to higher prices.

The equity hasn't traded above $6 since February, and for the most part has been trending lower for months. Increased short selling certainly hasn't helped, with the number of shorted shares increasing by 14.6% in the last reporting period. Amazingly, more than one-fourth of the stock's float is now held by short sellers, and going by average daily trading volumes, that's six days' worth of buying power.

Some of these short sellers may have used call options to hedge, however. That's because more than 11,000 calls have been bought to open during the past 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), compared to 1,242 puts. Either way, near-term volatility expectations are relatively low right now, based on the security's Schaeffer's Volatility Index (SVI) of 44%, which ranks in the 10th annual percentile.

To be sure, most analysts remain skeptical of AK Steel. There are 10 brokerage firms covering the stock, and seven of them have "hold" or worse ratings. At the same time, the average 12-month price target stands up at $5.30.

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