Could US Steel Stocks Be a Contra Play in 2020?

• Overall, 2019 was a mixed year for US steel stocks. However, due to the rally in the fourth quarter, most stocks managed to close the year with gains.
• We’ll discuss Wall Street analysts’ view on the stocks. We’ll also look at the sector’s 2020 outlook.

Last year was a roller coaster for US steel stocks. The prices continued their downside, which started in the second half of 2018. The escalation in the US-China trade war added fuel to the fire. Most metal and mining stocks hit their 52-week lows in May. However, domestic mills responded with supply-side discipline. U.S. Steel (X) idled two of its US blast furnaces in June. Domestic mills announced price hikes amid the plunge in prices. Eventually, the pricing improved in the fourth quarter.

Last year, U.S. Steel lost 37.4% and underperformed the SPDR S&P Metals & Mining ETF. Read Why US Steel Stock Underperformed Peers in 2019? to learn more. AK Steel (AKS) gained 46.3% last year and outperformed other companies in the space. The stock rallied sharply in December after Cleveland-Cliffs (CLF) announced that it would acquire the company. Nucor (NUE) and Steel Dynamics (STLD) gained 8.6% and 13.3%, respectively, last year. The S&P 500 gained almost 29% last year. Except for AK Steel, all of the stocks underperformed the markets in 2019. However, the returns are still better compared to 2018 when the stocks fell despite President Trump’s tariffs.

Based on the percentage of “buy” or higher ratings, Wall Street analysts are mainly bullish on Steel Dynamics. Overall, 71% of the analysts recommend a “buy” or higher rating. Nucor ranks second with 67% “buy” or higher recommendations. Cleveland-Cliffs is rated as a “buy” or higher by 44% of the analysts. U.S. Steel and AK Steel don’t have any “buy” ratings. All ten of the analysts polled by Thomson Reuters rated AK Steel as a “hold.” U.S. Steel has the lowest percentage of “sell” ratings among the stocks.

Wall Street analysts don’t see much upside in the stocks. U.S. Steel’s mean consensus target price implies a potential downside of 7% over the last 12 months. Notably, the company released its fourth-quarter guidance last month. Notably, the company expects to post a loss on the EBITDA level in the fourth quarter. The company hasn’t posted a negative EBITDA since the first quarter of 2016. The guidance spooked investors. As a result, the stock fell and added to the company’s 2019 losses. To learn more, read Dark Clouds Hover over U.S. Steel despite Trump’s Tariffs.

Analysts’ target prices suggest an upside of 4.3%, 5.1%, and 6.8%, respectively, in Steel Dynamics, Cleveland-Cliffs, and Nucor. Notably, analysts are mainly bullish on energy stocks for 2020. Oil prices might gain amid the recent tensions in the Middle East. The OPEC+ cuts would also support oil prices. However, rising US oil production is a bearish driver.

In my view, Wall Street is a little too bearish on the steel industry. Several indicators have shown signs of bottoming out in China—the largest consumer of most metals. An uptick in the Chinese economy would help global and US steel prices. The US  prices were strong in the fourth quarter. The momentum might continue in the first quarter as well. The first quarter is seasonally strong from a demand perspective. In my view, domestic mills might give positive commentary on the industry’s 2020 outlook. Analysts might look at the sector again after the first-quarter earnings are released. With Wall Street being too pessimistic, the stocks might be a contra play for 2020.