U.S. Steel Stock Downgraded by Credit Suisse

Credit Suisse

In spite of marked improvement in profit lately, U.S. Steel stock has had a rough time over the last year, losing 60%. With more concerns on the horizon, the outlook dims further.

President Trump is well known for being willing to use any weapon at his disposal when negotiating, and his use of Section 232 to impose tariffs on steel and aluminum upon Canada and Mexico as part of the process of re-negotiating NAFTA, in the name of national security, certainly qualifies as an off-the-wall tactic.

This is not dissimilar to his wanting to declare a national emergency to build his Mexican wall, even though it’s pretty clear this is not the sort of thing that was intended when this power was conveyed upon the president. This was set up instead to allow appropriations that were so urgently needed that waiting for Congressional approval just couldn’t wait, leaving them to deal with it in due time.

Building this wall isn’t even close to this threshold though, nor are these tariffs out to protect national security, but when we leave the president to decide whether or not certain things qualify, and expect that this power will be used only when necessary, and that president is Donald Trump, all bets are off.

While Trump insists on the tariffs remaining after the agreement, neither of the two countries or Congress agrees. The only person who could possibly not see this as a charade is Trump himself, although whenever one bends the rules to a level that is so distortive, one is usually pretty aware that they aren’t acting genuinely.

As is usually the case, Trump’s tariffs were met by retaliatory tariffs, so it’s not that this wasn’t without consequences. Congress won’t sign off on a new NAFTA deal with these still in place, nor will Canada and Mexico. The parties continue to stand their ground. There is at least a risk and a pretty good one, that this will not be allowed to stand for all that longer.

Improving the lot of companies like U.S. Steel is exactly the intent of these tariffs, which artificially inflate the price of imports and allow domestic companies to gain a competitive advantage. This is of course not about national security at all, and certainly is nowhere near the intent of this provision, to address a situation of such timely importance to national security that it would not be prudent to wait for Congressional approval.

U.S. Steel is Now Making a Lot More Money, But Their Stock Has Tanked

We would think that all of this would provide a little boost at least to the stock of U.S. steel, even though the benefits may not last once the parties eventually get to a showdown. Business-wise, this did help, but the stock has instead taken a real beating since all of this was announced.

Back then, U.S. Steel traded around $46 a share. This may have been a long way off from its all-time high back in the summer of 2008 of $186.93 a share, but we may never regain what was lost over the rest of 2008. By November, the stock dropped all the way to $24.91. This is what you call a real crash, and U.S. Steel has not been the same since, and never made it back to even $66, let alone $186.

This tariff battle has hurt other U.S. sectors, because these battles do involve shots being taken on both sides, and the response is a measured one where the cost of the tariffs get thrown back upon the opponent. In practice, the tariffs serve a redistributive function, taking from other sectors and providing a handout to companies like U.S. Steel.

Not surprisingly, the move was good for U.S. Steel’s business, increasing their operating profit by 38%. The fact that this was all met by a big thumbs down by investors tells a big story therefore, and it’s one that has this company well out of favor and likely to remain so.

U.S. Steel stock was already in decline when the market pullback hit in October, having already dropped below $30 from the $46 it started at when the tariffs were announced. Predictably, they fell quite a way from here during the mini-bear market, all the way down to $17.27 on December 24.

While the market has put in some big gains since then, U.S. Steel maintained its underperformance, and the fact that they are down to $17.77 now is probably the scariest thing about all of this for stockholders. When neither much improved business performance nor a strong market rally cannot prevent this stock from losing more ground, your stock is in serious trouble indeed.

Things Are Set to Get Worse

According to analyst Curt Woodworth of Credit Suisse, things are going to be getting worse. He just downgraded the stock from neutral to underperform, although things have been far from neutral lately, and underperform would be quite an understatement.

It’s not even clear what it would take for this stock to perform again, but it surely won’t be coming from new supply concerns for the company, which Woodworth cites as the main reason for his downgrade. These higher prices lately have really stimulated the supply side, and a lot more of it is expected to come online in 2021 and 2022, and is expected to cut significantly into the profits of the company, the profits that have increased while the stock continued to sink further into the mud.

Investors probably aren’t going to need too much encouragement to get out of and avoid this stock even more than they do now though, and if the 10% drop on Tuesday after this downgrade was announced is any indication, Woodworth’s new $13 a share target might actually be too optimistic.

It might be reasonable given the analyst’s projected impact of all this on the company’s bottom line, but this stock is clearly driven by more than just fundamentals, which is rather obvious when the fundamentals improve but the stock drops by over 60% in the face of this brighter outlook. As the outlook dims, we may expect that this sheer disdain for the stock independent of its fundamentals will continue to drive it down further than the numbers would suggest.

This threat from the flood of capacity that we are expecting has not only concerned Woodworth. Bank of America analyst Timna Tanners has called it “steelmageddon,” and that’s not a word usually used for relatively minor events or even manageable ones.

This is not a stock that has had any place in our portfolios for over 10 years now, and while they did enjoy quite a ride in the period up to that, climbing from below $12 in 2003 to over $186 just 5 years later, some balloons don’t get blown back up when they burst. When things look even worse going forward, investors have all the more reason to do the right thing and save their breath to use on stocks that can actually hold air.