Could US Steel (X) start a multi-year run to $50? (80% upside)

It's a little funny to be publishing new long ideas when the Russia-Ukraine conflict is in the midst of escalation.

Over the weekend, The US took Russian banks off the SWIFT network. The Russian stock market is down another 20%. The S&P500 is going to open tonight down 50 points.

However, here is an idea that looks promising once the Russian conflict dies down, although it could drag on for weeks.

US STEEL (X)

Due to time, I will only include the main points. Do your due diligence for more details.

The main points are as follows:

1. Speculative Value

2. 2.6x fw 2022 PE at high steel prices. fw PE will likely drop fw 2023, but even if it drops to estimated fw 2023 10x PE, it's still undervalued, not counting the great surge in cash flow expected in 2022.

3. Management is bullish on 2022.

4.I nflation favors Steel.

5. Russia sanctions decreases global steel supply.

6. Sentiment on steel stocks are fickle… so we use a technical target instead of a fundamental one. But the technical trade is waiting for CONFIRMATION.

7. Target Price if flag pattern break out is successful at least $36.

Some details and current results:

•Analysts horribly wrong for 2021. They expected negative $-1.55 per share for 2021. US Steel made +$15 on favorable steel prices!

•2022 earnings estimates have risen from $4 to $10 today.

•The last 2 years’ profit boom has transformed its balance sheet.

•Made $1.5 CFO in the third quarter of 2021 and repaid 1.3B in debt.

•Net debt is only $2B. Market Cap is $7B at $27 share price.

•Inflection point: just started share buybacks on Oct 28th, 2021 ($300M). Small, but a start.

•Morgan Stanley models an EPS of $2.3 in 2023. That’s still a fw FY23 PE of 11x now.

•Russia exports 7% of the world’s steel. The Russia/Ukraine issue only decreases supply for steel this year.

•Risks:

•Steel Price drops lower than expected.

•Global Recession.

•Technical Target: A breakout of the multi-year consolidation implies at least a $36 price target.

•We believe the fundamentals can justify this price.

Management are "overwhelmingly positive" for 2022 during their recent earning's report transcript.

At a technical make it or break it point:

Price chart at a multiyear trendline resistance that if broken higher is very bullish.

This is a SPECULATIVE VALUE PLAY with high reward to risk.

The technical are at key levels to make or break.

As a bonus, during 2001 to 2007, the last time that growth rotated heavily to value, US steel price went up all those years. The company is better now than it was in 2007. It is earning more and it has a better balance sheet. The idea is to go long at some point, expecting price to break out of the multiyear resistance.

A successful breakout implies a move toward $35 and beyond.

Easy to place a sell stop at around $24 in case this move to the upside is a fake out.

DON'T FORGET that the jury is still out about the broad markets. There are data points to suggest why the markets can drop further from here, but also data points to suggest that even if it drops, it might not drop much lower than the recent low. Those who are uncertain about the broad markets may wait for better prices.

As a speculative value stock, it one chooses to go long, it should be part of a diversified portfolio. Don't put all your eggs in one basket.

As always, do your due diligence. This post is for educational purposes and meant to give you ideas that you can further research and consult with your financial advisor. Or, having this idea in mind in case the prices drop to a level you are happy with.

Cheers.

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