This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Deutsche digs U.S. Steel
And speaking of the "best," this week we saw one of the best investors in the business assign upgrades to two of the biggest names in the U.S. steel industry: AK Steel (NYSE: AKS  ) and U.S. Steel (NYSE: X  ) itself.

According to German megabank Deutsche Securities, now's the time to invest in the cyclical steel industry. First, because the valuation of the stocks looks attractive. But also because "steel prices are nearing a 'floor' [and Deutsche wants to] buy [AK Steel] and [U.S. Steel] in anticipation of steel price and demand inflection." Of the two, Deutsche appears to favor AK Steel as "particularly attractive" based on its valuation. But in general, when you consider that "AK Steel and US Steel shares are near levels from late '10 when US HRC was below $550/st," Deutsche thinks the stocks can only go up from here.

Why? Well, take a look at where steel prices are trending today. According to Steelonthenet.com, hot-rolled coil (the "US HRC" Deutsche talks about) is projected to cost upward of $700 a short ton over the next 12 months. That's at least 27% more than $550, a number that precisely matches Deutsche's predicted "average upside of 27%" to its steel picks. Pricier steel, pricier stocks. Logical, right?

Let's go to the tape
It makes sense to me. In fact, I'd probably be inclined to follow Deutsche's advice and buy U.S. Steel and AK Steel today, if it weren't for one thing: Deutsche's absolutely miserable record of picking winners in the metals and mining industry:

Company

Deutsche Rating

CAPS Rating
(out of 5)

Deutsche's Picks Beating S&P by

Teck Resources Outperform **** (23 points)
Vale Outperform **** (31 points)
Cliffs Natural Resources Outperform **** 56 points

I should point out, too, that Deutsche is not doing much better with rival steelmakers like ArcelorMittal (NYSE: MT  ) and Nucor (NYSE: NUE  ) . It's lost big points backing both of these rivals. So why mention its record on the miners at all? Because Deutsche's lousy record charting the course of the folks who dig up the coal and iron that go into the steelmakers' steel may be the chink in an otherwise armor-plated buy thesis.

Foolish takeaway
While it's entirely possible that Deutsche is right about the stocks being undervalued (even a stopped clock is right twice a day), I must admit that I have my doubts.

Seems to me, if we're talking about investing in a trend that will boost steelmaking profits, you're still better off buying a company that's profitable already, and poised to become more so, than purchasing shares in an AK Steel or U.S. Steel that's un-profitable today, and may only break even tomorrow. Logically, if you think Deutsche's right about the big picture for steel, the best bet of all is to buy an already-profitable ArcelorMittal or Nucor instead of a "might eventually turn a profit" U.S. Steel or AK.

If you ask me, that's the best way to play Deutsche's upgrades.

Fool contributor Rich Smith does not own shares of (or short) any company named above, but The Motley Fool owns shares of Nucor and Motley Fool newsletter services have recommended buying shares of Nucor. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 534 out of more than 170,000 members. The Motley Fool has a disclosure policy. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (4) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2011, at 3:37 PM, esymoni wrote:

    Seems to me you need to do a little more homework before you call a company unprofitable when it has a positive EPS and throwing off cash in bales.

    Post all the facts not just your opinion and if you are calling a company unprofitable, at make sure it actually is.

  • Report this Comment On June 30, 2011, at 5:02 PM, amkotas wrote:

    Why not check out the world cost curve for steel, which is also published by Steelonthenet.com?

    According to http://www.steelonthenet.com/kb/world-cost-curve-hrc-q1-2010... both ArcelorMittal and US Steel have some very low cost plants.

    ArcelorMittal also owns the lowest cost HRC production site in the world - in Kazakhstan.

  • Report this Comment On June 30, 2011, at 6:53 PM, watchem2 wrote:

    Who cares what any investment bank says?

  • Report this Comment On June 30, 2011, at 6:53 PM, watchem2 wrote:

    Do you really think they are watching out for you?

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