Hard to believe, but a couple of short weeks ago Dow component U.S. Steel (X) was one of the darlings of Wall Street. It seemed as if every analyst had a “buy” rating on the Pittsburgh powerhouse and every portfolio manager was following that advice. Shares of U.S. Steel hit a $196 intraday high back on June 24.

Then, someone pulled the fire alarm and investors ran for the exit. Shares plummeted to the $140s on July 8th. Those who no longer smelled smoke on July 9th spotted a fire sale and bid the shares up 5%.

These days, U.S. Steel’s shares are still trading at a hefty discount to where they were just a few weeks ago.

So, what gives?

One theory is that investors were simply taking profits as other red-hot commodity sectors like coal (see, “Cashing In On Coal Stocks“) and agriculture that were once red hot started to cool down a bit.

Another theory surrounds the sustainability of the worldwide demand for steel. The rise of Brazil, Russia, India, and China (BRIC) nations, whom many consider to be the most influential of the world’s emerging markets, has driven steel prices to historic highs, which makes investors very enthusiastic, but very nervous.

Nerves of Steel

Analysts upgrades buoyed U.S. Steel’s shares, noting high spot-steel prices and an ability to control iron and coal costs makes U.S. Steel one of the strongest stocks in the industry.

Let’s face it, steel has been the place to be for more than three years now, because of the insatiable global demand for commodities (most notably iron ore). While the U.S. market may be experiencing a weakness in demand, strong global demand coupled with low imports can support steel prices well into 2009, according to analysts at UBS.

I’m not bending on U.S. Steel. Not only does it have a strong position in the industry as a leading supplier for oil and gas, U.S. Steel controls its own iron ore reserves, making it less vulnerable to volatile spikes commodity prices.

With earnings estimates at $16.70 per share for fiscal ’08 and $18.89 per share for FY’09, investors have become comfortable with the U.S. Steel’s risk vs. reward ratio. Although shares trade for a low valuation, investors should keep an eye on revenues. If growth does slow, earnings may not deliver. I think investors should pick up these discounted shares as the global growth boom is nowhere near finished.

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