3 Big Reasons This Steel Stock Jumped 12.7% in May and Continues to Rally

What happened

Shares of United States Steel (NYSE:X) jumped 12.7% in the month of May, according to data provided by S&P Global Market Intelligence. Strong numbers from the steel manufacturer, a favorable macro environment, and a multitude of analyst upgrades fueled the rally in U.S. Steel stock and continues to drive it higher this month.

So what

U.S. Steel shares kicked off May on a strong note thanks to encouraging first-quarter numbers released on April 29. The industrial company’s sales rose 33% to $3.7 billion and it earned a net profit of $91 million versus a loss of $391 million in the year-ago quarter. During its earnings conference call, management expressed optimism about the steel market thanks to robust demand, rising steel prices, and a potential infrastructure bill under President Joe Biden that should further fuel demand.

A person cutting steel pipes in a factory.

Image source: Getty Images.

On May 4, Credit Suisse echoed U.S. Steel’s sentiments when it bumped its price target on the stock substantially to $35, representing 42% upside from the stock’s closing price on May 3. Credit Suisse believes the steel sector is in a “super cycle.” A week later, Morgan Stanley upped its price target on U.S. Steel stock to $32, citing strong steel prices driven by low steel imports and inventories, among other things.

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Fears of Biden rolling back steel tariffs as the U.S. and Europe began negotiations in May could have brought the rally in steel stocks to a grinding halt if not for rising steel prices. Steel tariffs imposed by former President Donald Trump essentially helped the U.S. steel industry ride out the COVID-19 pandemic, which is why steel groups in the U.S. urged Biden to retain tariffs last month.

Meanwhile, the price of hot-rolled coil (HRC), also the most widely used steel product and therefore a barometer for the steel industry, is hitting record highs. In the first quarter, HRC accounted for 60% of U.S. Steel’s total shipments.

Now what

Unexpected recovery in steel markets has triggered strong investor interest in steel stocks, and there appears to be no stopping the enthusiasm: On June 4, UBS doubled its price target on U.S. Steel shares to $30. The stock is up 5.7% so far in June as of the time of this writing and has rallied nearly 150% in the past year.

Keep an eye on U.S. Steel’s balance sheet, as it added debt worth nearly $2 billion when it acquired electric-arc furnace mill Big River earlier this year, pushing its total debt above $5 billion. The company expects to repay at least $1.8 billion debt in 2021. Its financial fortitude and a potential infrastructure bill could largely decide how far U.S. Steel stock can go.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

View more information: https://www.fool.com/investing/2021/06/09/3-big-reasons-this-steel-stock-jumped-127-in-may-a/

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