While the Apple (NASDAQ:AAPL) earnings report hogs the headlines this morning, U.S. Steel (NYSE:X) also reported earnings last night. The knee-jerk reaction from investors sold X stock down 3% on the headline, but now it has reversed to green.
Management delivered a solid quarter and the company beat expectations on earnings but they committed the cardinal sin of earnings reports and lowered forward guidance slightly. These days investors want to see confident management teams or else they sell the stock, even on good results. The company is still doing buybacks, so they are confident enough in their future.
It hasn’t been easy for U.S. Steel stock. They have been operating inside a whirlwind of headlines that’s directly impacting their business. Sentiment is extremely bad due to the global tariff war uncertainties, so delivering a solid quarter in this environment is a testament that U.S. steel management is competent and the company will continue to prosper.
Fundamentally, X stock is cheap. It sells at a price-to-earnings ratio of 11. Nevertheless, investors don’t care. This has been a very difficult year for the whole sector and the X stock price was down 28% going into the U.S. Steel earnings report.
The good news is that this morning we have a favorable headline from President Trump alleviating some of the tariff worries. So U.S. Steel stock flipped from being down 3% to “greenish”. Regardless of the reason why, often enough a reversal on a headline carries momentum.
Fears remain, however, and the U.S. is coming into an election week that is important to the Republican party’s growth plans. The country is extremely bifurcated these days and the reaction could be violent. But I do believe that the fundamentals for the economy and the macroeconomic situations still favor upside in stocks.
Companies are making money and people are spending it. And this is likely to continue unless the world leaders commit a slew of errors, which is unlikely. There will be ups and downs, but for the long term, the X stock price should do well.
The Immediate Opportunity in X Stock
Technically, a stock that falls into a prior pivot zone finds support. Those who fought over it back in time would want to fight over it once again. This creates congestion and an opportunity for the bulls to base and mount a rally.
This is the case for stock in U.S. Steel. It has support around $24 per share. And in this macroeconomic environment I am willing to risk owning it for the mid term to try and catch the swing back up to $33 per share. While this is not a guarantee, I do believe that the downside risk from current levels is much smaller than the upside potential.
As noted, we are not out of the woods so to speak. We are still in a correction from the highs. And we still have big headlines next week and more importantly the threat of higher tariff levels in January if the leaders don’t come to terms before then. Moreover, investors also worry that the U.S. Federal Reserve will go too far too fast with rate hikes.
The fear is that the Fed Chair Jerome Powell is fighting a battle of wills with President Trump and that our economy will be the one to suffer. So far, the Fed seems intent on raising rates without watching the actual data, so it is prudent to stay mindful of trade size. Accordingly, using tranches versus one lump sum is often best practice.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
