This Big US Steel Bear Admits Opportunity For Near-Term Upside

One of the most vocal United States Steel Corporation X bears on Wall Street has finally thrown in the towel and upgraded the stock.

The Analyst

Axiom analyst Gordon Johnson upgraded U.S. Steel from Sell to Hold and raised his price target to $37.

The Thesis

According to Johnson, there are simply too many near-term tailwinds supporting U.S. Steel to remain bearish on the stock. The domestic steel industry is entering a seasonally strong part of the year for demand. HRC prices tend to rise during the winter months. In addition, Johnson says the Trump administration’s protectionist policies will continue to support domestic steel.

“Since Donald Trump was elected the 45th President of the United States, the focus by many steel market pundits has been on U.S.-home-grown protectionist steel measures (232 case, Vietnam circumvention case, etc.), as well as the Trump administration’s promised tax reform and infrastructure packages, rather than ‘stone cold’ fundamentals (i.e., how much cash is each steel company generating vs. last year),” Johnson said in the Monday note.

U.S. Steel stock has soared 52 percent in the past six months despite the fact that the company’s free cash flow dropped from $304 million in the second quarter to only $128 million in the third quarter. Yet since Nov. 1, with the stock up 31 percent, Johnson said much of this outperformance is due to investor confusion about an accounting change included in the most recent report and optimism about the U.S. Commerce Department’s recent aggressive tariff ruling on Vietnamese steel imports.

Johnson said there's too much headline risk for investors to bet against U.S. Steel as the market awaits headlines about a Section 232 decision and a potential boost to 2018 guidance.

Price Action

U.S. steel stock traded higher by 1.4 percent to $33.71 Monday morning.

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