Trump Comments On Trade Caused This Analyst To Downgrade AK Steel, US Steel

United States Steel Corporation X shares jumped 7.2 percent on Wednesday after the company’s second-quarter earnings topped Wall Street’s expectations. However, comments from President Donald Trump about his ongoing investigation into U.S. steel imports this week may have taken the wind out of U.S. Steel’s sails, according to Longbow Research analyst Chris Olin.

On Thursday, Olin downgraded U.S. Steel and rival AK Steel Holding Corporation AKS from Buy to Neutral after Trump said potential restrictions on U.S. steel imports under his Section 232 authority would be put on the backburner for now while Republicans focus on higher-priority issues such as healthcare and tax reform.

Olin now sees only a 50 percent probability of a positive outcome from Trump’s investigation, down from a 70 percent chance just a month ago.

“The uncertainty on the Trump Administration steel import policy was reflected in modestly slower steel activity,” Olin wrote. “Over the past few days, industry contacts suggested the channel returned to ‘business as usual,’ with customer orders and price expectations turning flattish.”

With U.S. Steel already up 19 percent in the past month, Olin sees little room for upside unless Trump can provide a meaningful boost to domestic steel prices.

In the meantime, Longbow suggests investors focus on mini-mill names, such as Nucor Corporation NUE and Steel Dynamics, Inc. STLD. Olin likes these two companies’ exposure to nonresidential construction, lower HRC cost structures, relative insulation from the auto industry and their strong balance sheets. Longbow maintains Buy ratings on both stocks with a $66 price target for Nucor and a $40 price target for Steel Dynamics.