I'm all about trying to pick up the best stocks in a given industry (assuming they're cheap enough), but it's an undeniable fact that you can also often make money from the second-tier operators as well. And so while I'm not about to say that U.S. Steel (NYSE:X) is the best-run steel company in the United States, it may yet be the one with the most potential left in the stock price.
U.S. Steel's results for the quarter do suggest that the steel markets have come around in the steelmakers' favor. Results were generally down across the board on a year-over-year basis, but the sequential comparisons were quite a bit stronger. And given the present outlook for demand and pricing, it would seem that 2006 could be another good year for the steelmakers.
At this point, you could still say that U.S. Steel is something of a turnaround story. What's more, it's relatively well-positioned for an environment with high material costs. And don't forget all of the M&A chatter. Should Arcelor succeed in remaining independent, U.S. Steel might start to look rather interesting to this European operator.
The big bogeymen right now are the Chinese and the threat of imports. China does have impressive steelmaking capacity, but I think some of that is rather more theoretical than real. Not all of those Chinese mills can supply the higher-quality steel that most American buyers want, and not all of those mills can operate efficiently and profitably. And so while I don't want to dismiss the risk of imports completely, I do question how much of China's rated capacity could really be sustainably utilized for export.
If Nucor (NYSE:NUE), Steel Dynamics (NASDAQ:STLD), POSCO (NYSE:PKX), Mittal (NYSE:MT), and U.S. Steel were all trading at similar valuations (by my cash flow models), there's no way that I'd rank U.S. Steel first on the list. But they're not all trading at similar valuations, and so U.S. Steel is worth a good look from anybody looking to add steel to his or her portfolio. I'd personally go for Steel Dynamics or Chaparral (NASDAQ:CHAP) even today, but I can't deny that U.S. Steel seems pretty interesting at these levels.
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POSCO is a Motley Fool Income Investor recommendation, while Mittal is a Motley Fool Inside Value recommendation. Take the newsletter that best fits your investing style for a 30-day free spin.
Fool contributor Stephen Simpson owns shares of Mittal but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares). The Fool has an ironclad disclosure policy.
