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.
And so it ends
Investors in Ohio steelmaker AK Steel
I'll tell you how it worked out: Over the past six months, AK shares have shed 43% of their value, falling from a closing price of $15.76 per share on June 30 (when I wrote up the Deutsche write-up), to a current valuation of $9.04 per share. Adding insult to injury, the Dow Jones Industrial Average as a whole had the temerity to eke out a 1% gain. Not that you'd know it from reading Deutsche's latest report on the stock.
Noting that AK had experienced "recent outperformance," Deutsche removed its buy rating on the stock yesterday, and cut its price target to $10 per share. Said the analyst: "We are lowering AKS to Hold on recent outperformance ... lower expectations for its carbon and electrical steel businesses, scale of estimate cuts, perceived earnings risk, continued concerns over its financial profile & pension obligations and valuation."
Why so shy, Deutsche?
Notable in Deutsche's write-up is that you'll find not one word mentioning how, just a bit over a half-year ago, Deutsche was calling for a rocketship ride to $17.50 per share. (But that's OK, Deutsche. That's why we built Motley Fool CAPS in the first place -- to help analysts remember what they said in months past.)
Another thing that might be worth remembering: I told you so. Ever since Deutsche, and the rest of the Wall Street, began singing the praises of the steel sector, I've warned investors against following these pied pipers to their doom. In fact, as recently as December I criticized Deutsche peer Wells Fargo for urging investors to double down on their AK bets. At just under 10 times earnings, the stock may look cheap -- cheaper than U.S. Steel at any rate. But just like U.S. Steel, and just like industry behemoth ArcelorMittal
A better idea
Now I don't want to end this column on a down note, and in fact, there is good news to report, as well. While I've little confidence in AK, U.S. Steel, or Arcelor outperforming the market, Deutsche's other steel idea this week has more merit. At the same time it was downgrading AK yesterday, Deutsche also offered investors a new buy idea in the form of minimill operator Steel Dynamics
I agree with it on at least one of these points.
With more than $150 million in annual free cash flow, Steel Dynamics looks to me like it's on firmer footing than any of the bigger name steel stocks discussed so far. The stock sells for 22 times free cash flow today, which is a price that might prove nice if the company achieves consensus growth forecasts of 21.6% annually. It's not my favorite stock in the sector, however.
Foolish final thought
If you ask me, the best bet for steel investors today is the same stock I said was the best bet seven months ago: Nucor
That's why, today, I'm going to put my reputation where my mouth is. I'm heading over to Motley Fool CAPS right now to publicly rate Nucor an "outperform." Feel free to follow along, and jeer loudly if I'm wrong.
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