Sometimes, the perfect value stock is simply too obvious to ignore.
Cyclical stocks are usually the best places to go hunting for these out-of-favor companies because while the stock price may be low, it’s a good bet that the stock will rise up once that market sector falls back into favor.
For one materials staple, a fallen stock price in an out-of-favor market sector could translate into big gains for patient value opportunists.
A Materials Superstar With Upside Potential
United States Steel Corporation (X) is a $4.85 billion steel manufacturer with production operations in the United States and in several European countries. As of 2018, it was the eighth largest steel producer in the world and the second largest in the US behind Nucor.
The company reported a first quarter earnings beat of $3.05 per share compared to the analysts’ consensus estimate of $2.95 per share.
Most impressively, it posted a record-setting first quarter net earnings result of $882 million compared to the prior year’s first quarter of $91 million.
Following the earnings report, management set expectations to post another record-breaking result for the upcoming second quarter.
The biggest catalyst for US Steel right now isn’t just its deeply discounted stock price, but also the current geopolitical tensions surrounding Russia. The challenging supply chain is boosting demand and causing material prices like steel to skyrocket.
But even after the political crisis is over, US Steel is well positioned for sustained growth thanks to a stronger overseas presence and new mini-mill technologies.
Analysts gave conflicting recommendations for the stock in June with JP Morgan issuing an “underweight” recommendation and a price target cut from $34 per share to $28 per share while Credit Suisse held steady at “outperform” but cut its price target down from $49 per share to $44 per share.
In either case however, the current price of less than $20 per share makes it a must-have pickup for any value investor.
The Fundamental Underpinnings
The stock trades at an ultra-low multiple of just 1.3 times earnings, although the iron & steel industry average is similarly low at 3.4 times earnings.
The low P/E makes the projected long term EPS growth rate of 8% look quite strong giving it a PEG ratio of less than 0.20 – a huge sign that the stock is currently trading below its intrinsic value.
It comes with a modest 1.03% dividend yield which helps to buffer investors against sustained downside movements in the market as well.
The Technical Framework
US Steel’s chart clearly shows a stock that is trading in a valley at the moment. But like all cyclical stocks, those valleys make their way to become new peaks over time.
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The 20-day SMA is current trending below the 50-day and 200-day SMAs as one might expect to see in an out-of-favor cyclical stock.
However, the candlesticks show several recent hammer formations which signify future bullishness while the RSI of 30 marks the stock as being solidly in “oversold” territory right now.
The Bottom Line
Based on US Steel’s full year EPS estimates, this stock should be fairly valued at around $30 per share – a whopping gain of more than 54% from its current trading price.
Investors looking for a deep value play who don’t mind waiting for it to develop over time will want to snap this winner up as soon as they can.
The above analysis of United States Steel Corporation (X) was provided by financial writer Daniel Cross.
Is United States Steel Corporation (X) A Buy or Sell?
Based on MarketClub’s technical analysis tools, United States Steel Corporation (X) is showing some rallying power, but still remains in the confines of a long-term downtrend. Keep an eye on X as it may be in the beginning of a reversal.
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