When I was growing up in Pittsburgh, nearly everyone had some
connection to the steel industry. If not your own parents, then
it was your uncle or neighbor who was employed by the huge steel
mills lining the riverbanks. Even the city's pro football team is
named in homage to the once-great industry.
For Pittsburgh's residents, the best thing about the steel
business is that it paid its workers a solid wage. Many employees
with less than a high school education could purchase homes and
various luxuries, and even go on vacation once or twice ayear .
In fact, a close relative of mine who had a master's degree went
back to work in a steel mill: It offered better pay and benefits
than he could earn in a white-collar profession at the time.
The steel business drove the rest of Pittsburgh'seconomy . The
relatively high wages paid to the unionized steel workers were
soon redistributed to all segments of the population as the
workers increased their standards of living.
Then the unthinkable happened. Low-priced foreign steel began
to flood themarket , shifting demand for pricier U.S.-made steel.
Pittsburgh's steel mills started closing, leaving behind rusting
factories and virtual ghost towns that were once thriving centers
High labor costs meant the U.S. steel industry simply couldn't
compete with cheaply made foreign steel. Although the domestic
industry was a victim of its own success, one company was able to
remake itself enough to become a viable business today. In fact,
the company is showing signs that itwill be a profitable
I am talking about
U.S. Steel (
The largest business enterprise ever launched at the time of
its founding in 1901, U.S. Steel remains the largest integrated
producer in the United States. Despite the fact the domestic
steel industry crumbled to near irrelevancy in the late 20th
century, U.S. Steel managed to stay afloat by spinning off units,
moving into international locations and purchasing the bankrupt
assets of its competitors.
The company boasts amarket cap of close to $3 billion and
anenterprise value of nearly $6 billion. Although thestock throws
off a 1%dividend yield , U.S. Steel is not acash cow of a
company. It currently pressured by just under $4 billion ofdebt
with just over $700 million incash .
U.S. Steelshares are down about 28% this year, but it is
within the current weakness that I see opportunity. The lower
share price has also attractedinsider buying, which is a positive
sign for the stock. A director named Murray Gerber recently made
two large purchases of shares: more than 72,000 at $18.99 each
and nearly 13,000 more for $18.50 apiece.
In the technical picture,support exists just above $16
andresistance is at $18. Entering on a breakout close above $18
with stops just below $16 makes solid technical sense.
Other aspects that I find attractive about the company are the
facts that its European profitability has hit its highest level
since 2010 and that the majority of its 2014 convertiblenotes
have been satisfied.
While there are obvious risks, U.S. Steel has proved resilient
in the worst of times. As the global economy begins to climb out
of the doldrums, proven companies like U.S. Steel should go along
for thebullish ride higher.
Risks to Consider:
Despite U.S. Steel being close to a vertically integrated
company, it is still very reliant on raw materials, which exposes
it to fluctuations incommodity costs. In addition, thedebt load
of the company remains quite high, despite some recent positive
steps. Other headwinds include the potential for another global
slowdown and foreign competition. Always position size properly
and maintain a diversified portfolio.
Action to Take -->
The current low price and insider buying are clear signals
thatupside opportunity currently exist in U.S. Steel. However, I
would wait for a breakout above technical resistance before
entering the investment. My 12-month target is $23.
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