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Why MercadoLibre, Covenant Transportation Group, and U.S. Steel Slumped Today

By Dan Caplinger – Oct 13, 2016 at 5:07PM

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These stocks fell sharply, even as the stock market bounced back from its worst levels of the day. Find out why.

Image source: U.S. Steel.

Thursday was a mixed day for the stock market, but things could have ended much worse than they turned out. Early in the day, it looked as though major market benchmarks would take substantial hits following downbeat economic data from China that suggested further pressure on the international front.

Yet those concerns proved to be short-lived, and by the end of the day, the Dow managed to limit its losses to less than 50 points. Still, some companies didn't manage to recover quite as easily, and several stocks closed with big losses on the day. Among the worst performers were MercadoLibre (MELI 4.05%), Covenant Transportation Group (CVLG 1.55%), and U.S. Steel (X -0.08%).

MercadoLibre investors look to sell out

MercadoLibre fell 8% after announcing a secondary offering of stock in order to allow major shareholders to sell off part of their holdings. The Latin American marketplace website provider said that eBay (EBAY 1.05%) and one of its international subsidiaries would sell up to 5.5 million shares of MercadoLibre stock, which represents about two-thirds of the 8.1 million shares that MercadoLibre reported as eBay's beneficial stock holdings in the company as of an April 2016 SEC filing.

Even after today's share-price drop, eBay and its subsidiary could raise around $925 million in gross proceeds from the sale, taking its overall stake in MercadoLibre from roughly 18% down to about 6%. For MercadoLibre itself, the offering will have no direct impact, as the selling shareholders will take all the cash for themselves, and the company doesn't plan to issue any new shares as part of the offering.

Covenant warns of a slowdown

Covenant Transportation took a 16% hit in the wake of its warning about its third-quarter financial results. The trucking company said that it expects earnings for the quarter to be between $0.12 and $0.17 per share, down sharply from the $0.42 per share that it posted during the same period in 2015. Higher depreciation was one reason for the decrease, but Covenant also said that lower average freight revenue and higher claims expenses were also to blame.

Pointing to a weak environment for truckload freight, Covenant raised concerns about the entire industry, and several other trucking stocks fell sharply in sympathy. Given how low fuel prices are, the fact that transportation companies are still facing challenges is particularly disturbing, and could point to sustained weakness for their stocks for the near future.

U.S. Steel fears a softening market

Finally, U.S. Steel fell 6%. The steel manufacturer has had to deal with relatively low commodity prices for a long time, and the poor export news out of China was directly relevant to U.S. Steel's future prospects. In order to see a full recovery, U.S. Steel will need to have global economic activity pick up markedly, especially in the construction and infrastructure arenas.

If Chinese exports don't see enough demand, then manufacturers in the emerging-market nation won't have the incentive to build new facilities for making goods, and that, in turn, will keep steel prices under pressure. With market participants pointing to particular weakness in the coil steel market, U.S. Steel needs the picture for steel to improve quickly if it wants to avoid another leg downward for its stock.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends eBay and MercadoLibre. 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 has a disclosure policy.

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