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Invest In This Industry Titan's Revival

By: StreetAuthority
Posted: 7/1/2013 11:00:00 AM
Referenced Stocks: X

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 ofcommerce .

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 long-terminvestment .

I am talking about U.S. Steel ( X )

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.