What happened

Metals stocks are red hot in Tuesday trading, with shares of United States Steel (NYSE:X) leading the sector higher with a 21.3% gain as of 1:40 p.m. EST. Its steelmaking rival Cleveland-Cliffs (NYSE:CLF) is up 10.1%, and Aluminum Corporation of China (NYSE:ACH) is tagging along for the steel ride, up 11.3%.

And if you own any of these three stocks, you can probably thank the analysts at GLJ Research for your winnings today.

Molten steel pouring in a foundry

Steel stocks are red hot Tuesday. Image source: Getty Images.

So what

GLJ started off Tuesday with a pair of upgrades for shares of U.S. Steel and Cleveland-Cliffs. (Cleveland-Cliffs is still best known as a miner of iron, but with its purchase of AK Steel last year, and of ArcelorMittal's U.S. steel operations just this past summer, it has morphed into a steelmaker in its own right.)

Foreseeing a revival of car demand in the U.S., and a revival of "high-end auto steel markets" alongside it, GLJ says it is currently seeing the "most bullish setup we've seen for the US steel sector since mid-2019." "Global steel prices [are] surging," the analyst said in a note covered on StreetInsider.com this morning. This is happening at the same time as the U.S. steel market is enduring "acute shortages" in supply. Yet GLJ sees "massive ... liquidity" from government stimulus efforts, and more coming down the pike from a "stimulus-friendly Biden Administration."  

All of this argues in favor of pricing power shifting to steelmakers like U.S. Steel and Cleveland-Cliffs, and "now is the time to reengage steel stocks on the long side."

As for why a Chinese aluminum maker is coming along for the ride today, well, aluminum is a metal that automakers have been known to employ as an alternative to steel, especially when aiming to boost fuel economy ratings on their products. Combine that with a boom in Chinese electric car stocks, and I think it's pretty clear why Aluminum Corporation of China is rising today as well.

Now what

So where do we go from here? In GLJ's view, U.S. Steel, which cost $11 and change yesterday could conceivably soar as high as $17.30 over the next 12 months -- a 50% gain. Cleveland-Cliffs stock could do even better. Priced below $10 a share yesterday, GLJ sees that one going to $15.75 -- a nearly 60% upside.

Investors today seem to prefer the U.S. Steel idea, which is understandable, as it has the more recognizable brand name. But I'd be remiss in not pointing out the risks in both stocks, inasmuch as neither U.S. Steel nor Cleveland-Cliffs is currently a cash-generating enterprise. Both have burned cash over the past 12 months, with Cleveland-Cliffs' record negative $450 million in free cash flow, and U.S. Steel burning through $728 million.

In contrast, Aluminum Corporation of China has generated a cool $1 billion in real cash profit over the past year, and just might be the best bargain of the three.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.