Just a warning: This whole post exists only because I wanted to use that title.
US Steel (X) and Arcelor Mittal (MT) have both had their share prices crushed. The two stocks have actually tracked each other fairly well. Both steel companies appear to be well run companies. Still, things are not good for steel right now. There’s a lot of downside potential remaining.
I think steel companies are interesting for a number of reasons. They are the raw material of industry. They sell the product that makes cars, skyscrapers, factories, and dams. Unfortunately, with the possible exception of dams (and other such infrastructure), demand for steel products seems to be falling off a cliff. Even if the government chooses to bail out the auto makers, it won’t likely help steel demand all that much. In fact, I doubt that steel demand will really pick up until the all clear has been sounded for the global economy. You have to use your current factory to capacity before you build a new one. However, that makes the two companies particularly interesting to me. Once the stock market is out of the current bear market, it’s entirely possible that it won’t be recognized until well after the fact. That’s when it might be worthwhile to invest in steel companies (provided they have prices at or below today’s levels).
I bought a token amount (30 shares) of US Steel today to remind myself to keep checking. In retrospect, I probably should have bought Arcelor Mittal. It has a higher dividend yield and a lower price per share, though I still doubt I would have bought enough for a covered call. I’m comfortable holding these shares for a few years (I said that about Apple, but I hit an automatic sell for a quick 10% profit… I often make orders like that). Unlike Ford or GM, the lack of a taxpayer bailout doesn’t spell the automatic death of the steel companies. The companies are much better run than the US auto industry. They’ll shrink as demand shrinks, but they’ll be able to grow as demand recovers. That said, I don’t think these companies are going to hit their highs again any time soon. If the prices do fall 30% to 40% from here, I’ll triple my position as a long term investment (and the dividends). Right now, a covered call is the best way to enter a position (though it’s worth debating a protective put).
My position isn’t entirely retarded. The news from GM tomorrow is expected to be horrific. If it’s only terrible, there might be a rally in steel. I’ll even take a 5% profit. If I do, I’ll buy a token amount of Arcelor Mittal on the next dip. Ah, who am I kidding? I’m just being reckless because my puts have been so profitable. After the purchase today, I told myself that I would not make any more purchases until February (barring a crash, in which case my cash is going to work buying SPY, which I will cover with calls after any 5% rally).
