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.
Forecast cloudy, with a chance of rust
It's hard out here for a steelmaker. At last report, Chinese mills were churning out steel at the rate of 749 million metric tons annually. That's 10% above the country's prior peak output. And lately, with an economic slowdown crimping domestic demand, China's been forced to export the excess abroad.
Result: Chinese steel exports grew 28% in the first four months of this year. And as steelmakers in other countries cut back production, analysts are warning that "cut-price Chinese exports are taking market share" from other steelmakers.
Goldman calls it
If all this sounds familiar, well, it should. Last fall, Goldman Sachs warned investors that steel supply was exceeding demand, and that this would have a deleterious effect on prices heading into 2012. In a report on U.S. Steel
This week, Goldman's back with more bad news -- and this time it's shareholders of AK Steel
Warning of "continuing weak flat steel prices," and blasting AK for touting a "highly leveraged balance sheet, high pension funding requirements, high capex to fund its raw material strategy, and no sign of a turnaround in its lucrative electrical steel end market," Goldman sees little reason to stick around for the endgame. It may be right.
China to the rescue?
For all that it's Chinese overcapacity that's threatening the market, steel bulls are still placing many of their hopes for a recovery on China itself.
Recently, news of a $23 billion plan to support steel projects in China buoyed hopes for greater iron sales at Rio Tinto
Assuming the news is true, could this mean Goldman is wrong about AK Steel? Will China's moves be enough to save AK?
Not necessarily. It's been four years since AK last ended a year with a profit, and five years since it generated any positive free cash flow whatsoever. Burning cash and mired in debt (more than $1 billion), AK still looks like anything but a buy. Here at the Fool, we've got three stocks we think are much better positioned to profit from an industrial recovery than AK and its fellow steelmakers. (Read all about them here, in our new report: "The Future Is Made in America.")
If, on the other hand, you're dead set on investing in steel, and think China really is riding to the rescue this time, I'd suggest you avoid debt-laden cash-burners like AK Steel, and focus instead on efficient, free-cash-flow-positive companies like Nucor
Fool contributor Rich Smith holds no position in any company mentioned, but Motley Fool newsletter services have recommended buying shares of Nucor. 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.