U.S. Steel: Don’t make the same mistake again
August 30, 2012 11:16PM
Updated: October 1, 2012 5:46PM
D ear Mr. Berko: In early 2008, you told me not to invest in 50 shares of U.S. Steel when it was trading at $128, but I did, and within several months, it ran to $200. I didn’t sell, because I thought it would break through $200 and split. It didn’t, and when it fell to the $100 level, I thought it might establish a base, and I invested in 100 more shares at $103. I now have 150 shares, and as you know, the stock is trading at $23. I have a $15,000 loss. Do you think this is a good entry point to really lower my basis to $53 by investing in 300 more shares? I am told that U.S. Steel will earn more than $3 a share in 2013. Don’t you think this is a good idea?
Dear JD: Dumb is as dumb does. U.S. Steel’s earnings of $18 a share in 2008 supported that price, but today’s earnings of $3 wouldn’t support a titmouse. The textbook definition of stupidity — “doing the same thing over and over again and expecting different results” — fits you like a velvet glove. United States Steel Corp. (X — $22) is not an investment; it’s a cyclical stock, the price of which reflects the economic health of the world economy. One buys the stock of X, but one doesn’t invest in it. Investing requires a long-term focus in an industry in which a company’s revenues provide an orderly growth in demand that translates into continuously higher earnings, improving net profit margins, increased book value and growing dividends.
In my opinion, U.S. Steel never has been an “investment.” Rather, U.S. Steel in the past 15 years has been a volatile trading stock — tripling its share price at least on a dozen yearly occasions since 1997 between its 12-month low and its 12-month high. Meanwhile, I’m going to give you an absolute “guaranteed maybe” that X will return to a new $53 basis when hummingbirds begin flying over the Arctic Circle.
U.S. Steel should be profitable this year, and the Street expects X to report earnings of $1.38 a share this year and $3 in 2013. Sam, a small big shot at U.S. Steel (whom I’ve known since 1998), told me, “Steel will be lucky to earn $1 this year.” Sam and I had dinner in Tampa several nights ago, and I got stuck with a $146 bill. Sam scoffs at those “lofty” earnings, commenting that exports will continue to tank as the EU economy flounders and the U.S. economy flounders.
Meanwhile, steel imports are gaining momentum because of our increasingly strong dollar. And Sam cast aspersions on Wall Street’s stupid “analysts who sit in pastel color-coordinated offices pontificating on Steel’s earnings.” Sam is disappointed at the intransigence of the United Steelworkers, whose average member wages and benefits rose to $170,855 in 2011. (How do I get a job as a steelworker?) Meanwhile, nonunion shops with $30-an-hour pay scales are crushing X, and union work rules stifle productivity. Finally, retirees’ medical and life insurance plan is underfunded by $3 billion, and their pension plan is underfunded by $2.8 billion — and X sorely needs to spend billions and upgrade facilities.
I have this funny feeling that you are going to buy 300 more shares and lower your basis.
There is a remote but plausible extension of reality that U.S. Steel stock could return to the middle $30s in three to four years, but I strongly doubt that the stock will return to the low $50s and allow you to exit without a loss. This industry continues to be under enormous pressure from overcapacity, a troubled global economy and a dependence on volatile raw materials, the long-term prices of which are not dependable. And though production is up this year (which is no big deal, because it was so low in prior years), it’s well under pre-recession levels, and many think that this is where it will remain.
Address financial questions to Malcolm Berko,
P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.