Yesterday US Steel (NYSE:X) stock fell 3.25% on an analyst downgrade. Bank of America Merryl Lynch moved the stock from a BUY to SELL and lowered the price target 40% from $31 to $18 per share. This is a massive change and warrants some caution on X stock.
The analyst, Timna Tanners, speculates that steel prices will lack the catalyst needed to boost them, so X will burn more a lot of cash thereby putting pressure on the stock price. So the stock is suffering because of an economic war between mills. Those are keeping prices low to gain a bigger share of the market. Other competitor stocks also suffered like Nucor (NYSE:NUE) and Steel Dynamics (NYSE:STLD) but X chart looks ugliest.
So is it time to catch this falling knife? Yes, but with a caveat.
Fundamentally speaking, X stock is cheap as it sells at a trailing 2.6 P/E ratio. This is very cheap — provided they can keep the denominator steady.
What Should You Do With X Stock?
So if I own the shares, it’s probably too late to sell now. As far as averaging down, I’d wait out a few more ticks to see the follow through price action from the downgrade. This also depends heavily on my base price for my shares. I’d avoid adding to a position too close in time or price to my last entry.
If I am looking to initiate a new position in US Steel stock, doing so now is not a clear decision. This requires a lot of faith but it is doable. We have to remember here that the downgrade offers one person’s opinion on the X situation so it’s not absolute fact.
It doesn’t help matters that coming into the downgrade X already had a hideous chart. It was already trailing the S&P 500 by 20 points year-to-date; it’s down almost 10%. For the past 12 months, X is down 54% so it’s been sliding for a long time. And it’s been under performing its peers too.
Which begs the question on what to do with X today. Buying the stock now and this cheap seems like an easy decision after all it already sells at such a low P/E. But the slide in the stock is very long-term in nature. This means that it’s not going to snap out of this downtrend quickly.
In this case I’d rather wait out a bit more even if it means I miss out on some profits. I’d rather be late entering a stock than too early and start a position in the hole.
Technically, X stock has been falling for so long that I need to use the weekly charts to get some input to help with the decision today. This means that the technical hints are slower in nature thereby supporting my decision to act today.
Yesterday’s fall places U.S. Steel stock in danger of triggering a massive bearish Head-and-Shoulders pattern. In fact, technically one could argue that it’s already below the neckline and that puts it in danger from targeting the single-digit zone. While this is not a forecast, it is a scenario that could unfold and bulls need to know it.
The Bottom Line on X Stock
In summary, I don’t usually panic out of a stock based on one person’s opinion. But in this case, I would wait bit to get more clues. The next few days will be crucial for X stock and they will provide valuable clues for investors.
Most other analysts that cover X are on HOLD but there are a few still favorable of it. So it’s vulnerable from more surprise downgrade from those analysts that still have it as a BUY.
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.