The stock market occasionally offers investors an unfair risk-to-reward setup to take advantage of some of the best and most stable stocks. Today, there’s no apparent recession or systemic discount across the market. Still, some stocks have traded at such low valuations that the potential opportunity is undeniable. This is especially true as the new business cycle is preparing to shift.
Today, a takeover from Nippon Steel Co. (OTCMKTS: NISTF) has been blocked, leaving United States Steel Co. (NYSE: X) to exit the market on its merit. The timing of the takeover blockage is interesting to watch, especially as the Federal Reserve is looking to cut interest rates as soon as September 2024, which might have been enough to stop the sale of one of America’s core manufacturing stocks.
The macroeconomic trends triggered by interest rate cuts could send United States Steel stock on a recovery path, especially as other names dependent on American steel, like Caterpillar Inc. (NYSE: CAT) and Cemex (NYSE: CX), come back online to ramp up demand orders as construction and trade activity shift to the better side of the scale.
Responsive Buying Signals Bullish Market Sentiment on United States Steel
When stocks sell off fast and unexpectedly, two things tend to happen. The first is what’s referred to as a poor low, meaning no buyers respond to the new low price to show them an unfair advantage and upside if they can lock in these lower prices.
The other way markets react is to accept this new low price as the reality, as new information (such as the blockage of a takeover bid) is assimilated and accepted for the current price. The fact that United States Steel sold off by nearly 30% after the news announcement, then quickly rallied by 4.3% the next day, shows investors there are responsive buyers now.
Rejecting the low prices is a start for investors to lean on a potentially bullish thesis in this company, realizing that the market thinks the stock’s fair value is above the recent sell-off levels. However, the market is not alone in this thinking.
Wall Street analysts now forecast up to 23.7% earnings per share (EPS) growth for United States Steel in the next 12 months, far from what a company that is supposedly going under should do. Based on this forecast, Morgan Stanley has landed on this stock's $49 price target, daring it to rally by as much as 56.5% from where it trades today.
Uncovering the True Source of Upside in United States Steel Stock
Investors need to remember that currency valuations are typically driven by interest rates just as much as they are driven by demand. Now that the Fed will cut interest rates this month, a weaker dollar could be expected in the coming months.
Weaker dollars mean more attractive deals for foreign buyers with stronger currencies like Mexico. Mexican-based Cemex relies on United States Steel to make its products and meet demand, so the company now has a guaranteed buyer.
Lower interest rates and cheap oil prices today also set the scene for hotter business activity in the coming quarters. The construction sector’s rise calls on Cemex, which in turn calls on United States Steel.
Caterpillar is another buyer of United States Steel, indirectly though still important to consider in the future of the steel provider.
Even after the incredible sell-off in the stock, bears are staying away from it in the middle of this unprecedented volatility. United States Steel stock’s short interest declined by 2.1% over the past month and has been steadily declining since the first quarter of 2024.
Why U.S. Steel's Current Valuation Favors Bulls Over Bears
Investors shouldn’t be surprised when and if they see a few institutional buyers entering the stock once the 13-F filings are released. Those at Sanctuary Advisors recently initiated a $491,000 position in the stock on the day the sell-off took place.
Investors need to understand that today’s price, a mere 62% of United States Steel’s 52-week high, is accountable for the potential opportunity present in the company’s future. On a price-to-book (P/B) basis, the company trades at 0.6x, or a 40% discount on its equity.
Why anyone would look away from a 40% discount in equity set to grow by double-digits this year and generate double-digit returns on equity (ROE) rates is beyond debate. However, the conclusion for all retail investors here is that the risk-to-reward scale favors bulls today and not bears, especially with current valuations and future catalysts.