The Big Money Says Don't Buy United States Steel

One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: United States Steel (NYSE: X  ) . Are institutions bullish or bearish when it comes to this industrial metals supplier?

Foolish facts

Metric

United States Steel

CAPS stars (out of 5) ****
Total ratings 2,066
Percent bulls 93.5%
Percent bears 6.5%
Bullish pitches  out of
Highest-rated peers Vale S.A., Companhia Siderugica Nacional, ArcelorMittal (NYSE: MT  )

Data current as of Oct. 27.

Fools may like U.S. Steel for the long term, but this past quarter, the country's best-known maker of flat-rolled steel reported a disappointing $51 million loss. A slowdown in orders and higher raw materials costs more than offset gains in other areas.

Shares of U.S. Steel haven't performed particularly well so far this year, down more than 25% to date. Without profits, or at minimum an uptick in demand here in the U.S. and in Europe, there are few catalysts to move the stock higher. (Other suppliers serve Asia, which is consuming large quantities of commercial metals.)

Some, including Foolish colleague Rich Smith, saw this decline coming. "Debt, pension obligations, and no free cash flow in sight. I'll take the 'Goldman bump' as a good excuse to go short this overvalued steel play. Much more value to be found in more nimble competitors like Nucor (NYSE: NUE  ) and Steel Dynamics," he wrote in January, when the stock was still trading above $60 per share.

Institutional ownership history

Top Owners

2007*

2008*

2009*

Latest*

Capital Research and Mgmt. 6,930,000 6,340,720 11,461,346 14,521,200
BlackRock 530,162 3,714,894 9,685,937 9,573,777
The Vanguard Group 5,487,764 4,218,154 6,766,651 7,033,286
State Street Global Advisors 4,190,536 5,026,905 6,244,090 6,020,123
Eaton Vance Management - 94,560 5,191,373 5,146,752
TOP 25 TOTAL 29,784,628 30,097,517 75,228,996 81,973,372

Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

But that's the past. Today's investors are hoping for a rally, or at the very least some promise of increased dividends over time. They may be waiting a while. U.S. Steel last hiked its dividend in 2008's second quarter, to $0.30 per share, only to slash it to $0.05 a share three quarters later.

For their part, institutions have increased their holdings from the end of 2009, but they've also trimmed their exposure to U.S. Steel since June. Not by much -- by just less than 300,000 shares, according to Capital IQ -- but enough to call them undecided on the company's short-term prospects.

Competitor and peer checkup

Company

Institutional Ownership

Insider Ownership

AK Steel (NYSE: AKS  ) 61.38% 1.26%
Allegheny Technologies (NYSE: ATI  ) 80.71% 1.29%
ArcelorMittal 25.51% 42.20%
Cliffs Natural Resources (NYSE: CLF  ) 80.96% 1.33%
Nucor 76.08% 0.53%
U.S. Steel 80.19% 0.45%
Worthington Industries (NYSE: WOR  ) 63.56% 6.86%

Source: Capital IQ. Data current as of Oct. 27.

U.S. Steel has two problems reflected in this table. First, because institutional ownership is already high, their next likely decision will be to sell. Second, because insider ownership is low, executives have less to gain if the stock rallies. Foolish shareholders prefer to have management sharing the risk with them.

So while I'm not as bearish on this stock as my friend Rich, I think the Big Money has it right. There's no reason to buy U.S. Steel at current prices.

Now it's your turn to weigh in. Do you think the institutions are wrong about U.S. Steel? Let the debate begin in the comments box below. You can also recommend other stocks for Tim to evaluate by sending him an email, or replying to him on Twitter.

Interested in more info on U.S. Steel? Add it to your watchlist.

Nucor is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.


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