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Why U.S. Steel Might Be Poised to Pull Back

By Brian D. Pacampara, CFA - Oct 30, 2013 at 11:27AM

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Does this analyst make a good case? Or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of U.S. Steel ( X -0.40% ) slipped 1.5% this morning after Deutsche Bank downgraded the steel company from buy, to hold.

So what: Along with the downgrade, analyst David Martin planted a price target of $26 on the stock, representing about 2% worth of upside to yesterday's close. While momentum traders might be attracted to U.S. Steel's 9% earnings-related pop yesterday, Martin believes that all of its efficiency improvements are now baked well into the valuation.

Now what: Deutsche thinks that ArcelorMittal ( MT -2.63% ) and Steel Dynamics ( STLD -1.10% ) offer better risk/reward trade-offs in the steel space. Needham noted:

Corporate initiatives announced are + and its shares have now risen ~45% in 6 mths partially in anticipation of the moves. Other + factors are HRC prices, pension benefits & trade cases. We believe these & further cost initiatives are understood or priced-in.

With U.S. Steel still trading at a clear price-to-sales discount to the industry, however, I wouldn't bet on too big of a pullback.

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.

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Stocks Mentioned

ArcelorMittal Stock Quote
ArcelorMittal
MT
$27.41 (-2.63%) $0.74
Steel Dynamics, Inc. Stock Quote
Steel Dynamics, Inc.
STLD
$58.94 (-1.10%) $0.66
United States Steel Corporation Stock Quote
United States Steel Corporation
X
$22.29 (-0.40%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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