Should I Buy U.S. Steel? 3 Pros, 3 Cons

It's an efficient giant, but investors should be cautious

When it comes to American icons, United States Steel (NYSE:X) is certainly on the list. But the past year has been brutal for shareholders, with the stock price down 55%. Of course, a big factor is the slowing global economy.

Yet is U.S. Steel a good bargain at these levels? Or will it continue to be dead money?

To decide, let’s take a look at the pros and cons:

Pros

Huge Scale. U.S. Steel is one of the largest operators in the global market. It has about 24 million tons of steel capacity in North America and 5 million tons in the Slovak Republic.

The company also has an integrated platform, which means it controls its own supply — such as coke and iron ore — as well as the blast furnaces. As a result, U.S. Steel has been able to keep its costs relatively low.

What’s more, U.S. Steel is a top producer of tubular products. These are key for the fast-growing oil and gas industry.

Liquidity. U.S. Steel has a solid amount, coming to roughly $2.5 billion. The next major debt payment — for $863 million — doesn’t come due until 2014.

To protect its liquidity position, U.S. Steel has slashed its dividend from 30 cents a share to 5 cents a share.

Valuation. The shares are cheap. Consider that the stock is at a mere 0.15 times sales. In fact, the shares trade at the lowest levels since the bleakest point of the U.S. recession in the first quarter of 2009.

Cons

Supply. The world has excess amounts of steel, especially in the U.S. The result is that steel prices have plunged.

Because of this, last week Standard & Poor’s lowered its outlook on U.S. Steel from stable to negative. The firm sees little hope of a recovery for the next year or so.

Competition. Even though U.S. Steel is a large player, it still doesn’t have the scale of mega-operators like POSCO (NYSE:PKX) and ArcelorMittal (NYSE:MT). They could further squeeze rivals with price-cutting.

China. Of course, the country’s hefty economic growth has been huge steel demand. However, the momentum is starting to decelerate. So far, the Chinese government has been adept at managing the nation’s economy, but it’s not clear if Beijing can prevent a more severe downturn.

Verdict

Even with a dirt-cheap stock price, U.S. Steel has no foreseeable catalysts. If anything, the struggling economy could worsen. After all, the slowdown is hitting many countries across the globe. And a hard landing in China could be severe.

Besides, U.S. Steel’s dividend is meager, share buybacks are unlikely.

So in light of all these factors, the cons outweigh the pros on the stock.

Lock and Load (Up) on These 2 Gun Stocks

Smith & Wesson and Sturm Ruger can't keep pace with demand

Firearms sales are on fire again in the U.S., with most of the credit going to citizens stocking up now on fears that the Second Amendment will become a target if President Obama is reelected. Then there’s always the desire to defend oneself against the threat of violence, particularly by extremist groups of whatever persuasion.

Naturally, this gets me thinking about what stocks might benefit from such a notable trend. The obvious choices are gun manufacturers. Looks like that’s been the way to go.

Smith & Wesson (NASDAQ:SWHC) racked up record quarterly and yearly growth in gun sales, up 28% and 20%, respectively. The company combined this performance with an 8.7% drop in quarterly costs and 4% annually. The result pushed much of these sales to the bottom line, with continuing operations income increasing from $5.8 million all the way to $25.6 million for the quarter, and tripling annual operating income to $39 million.

Plus, Smith & Wesson has $439 million in backlogged orders, it shipped a record number of units, generated $25 million in free cash, increased gross margins, paid down $30 million in debt and bought back $6 million worth of senior notes.

Clearly, this is all great news. Even better, S&W says it foresees a 50% increase in earnings this year to a range of 60 cents to 65 cents per share. The stock trades at about 14x earnings with analysts projecting 22% annualized growth going forward. That suggests it’s a value play at only $8.70 per share.

Sturm, Ruger & Co. (NYSE:RGR) has an interesting problem. It’s receiving more orders than it can keep up with. So much so that it suspended taking new orders for two months this year. In its Q1, it saw a 33% increase in revenue on a 49% jump in unit sales, which drove a doubling of profit.

The company has a great balance sheet, with $96 million in cash and no debt. Sturm Ruger generated $21 million of free cash in the quarter, which will go toward capital spending for the year, leaving the other three quarters as pure cash flow gravy. Earnings are also expected to rise 50% this year. The stock trades at 16x earnings, suggesting it’s a value play.

These stocks are considered consumer discretionaries, so they might make a nice supplement if you hold the Consumer Discretionary Select Sector SPDR (NYSE:XLY). That ETF is full of large-cap names like Target (NYSE:TGT) and Nike (NYSE:NKE), so small-cap gun manufacturers like these are a good way to add some diversification.

Will this trend continue? A Benchmark analyst says the firm sees “long-term, secular growth from the increasing social acceptance of firearms for both personal defense and recreation/leisure.” It seems to me that those who like guns have always liked guns and won’t stop liking guns. In addition, millions of potential converts are out there — and that gives the gun manufacturers a long way to go.

Source: Investorplace

5 One-Time IPO Stars Worth Considering

These companies have struggled but could turn things around

Kiplinger’s Personal Finance  ran an article in June that highlighted some of the favorite stock picks of George Putnam, editor of the Turnaround Letter. Putnam looks for former IPO stars who’ve fallen on hard times and now trade for half the original offering price. But rather than rehash Putnam’s picks, I’ve come up with five of my own: 

Green Dot

Green Dot (NYSE:GDOT) provides reloadable prepaid debit cards to customers who earn less than $75,000 and are traditionally underbanked. It’s best known as the sole provider of the Wal-Mart(NYSE:WMT) MoneyCard, a program that now has more than 2 million active cards.

Green Dot went public at $36 to great fanfare in July 2010, gaining 22.2% in its first day of trading. Since then it has lost 44.9% and overall is down 32.6% from its IPO as of July 2.

So what do investors get for this 33% discount? A company that’s increasing revenues and earnings. In the first quarter ended March 31, it raised revenues by 21.3% and operating income by 31.2%. Management expects full-year 2012 non-GAAP earnings per share of at least $1.65.

Shares jumped 10% July 2 on the news American Express(NYSE:AXP) was pulling its Bluebird prepaid reloadable card from Wal-Mart pilot locations on lackluster sales. There’s not much downside at this point.

General Motors

In January 2011, Renaissance Capital, a leader in IPO information and analysis, named General Motors (NYSE:GM) its 2010 IPO of the Year. At the time, GM shares were up 17% from the IPO price of $33. Since then it’s been all downhill for the automaker with its shares trading below $20.

InvestorPlace contributor Tom Taulli recently highlighted some of the reasons GM is part of the Real America Index. The two that stand out for me — $9 billion in earnings and 10 million shares bought by Berkshire Hathaway (NYSE:BRK.B). The big three have figured out how to make money on just 12 million vehicles sold annually.

Plus, with the average car being 11 years old today, it’s going to be next to impossible for GM to mess up this once-in-a-lifetime opportunity.

Booze Allen Hamilton

Management consultant Booze Allen Hamilton (NYSE:BAH) went public in November 2010 at $17 a share. Since then its stock has lost 12.9%. Clearly, its reliance on the U.S. government and many of its agencies has been a huge drag on the stock. However, its noncompete clause with its former corporate consulting unit ended last July, and since that time it has focused much of its attention on the Middle East, opening an office in Abu Dhabi.

While government belt-tightening, especially prevalent in the Defense Department, has made it difficult to generate organic growth, Booz Allen still managed to increase revenues and earnings in fiscal 2012. Revenues grew 4.8% to $5.86 billion, and adjusted diluted earnings per share rose 29.8% to $1.61.

Its year was so solid, management paid out a special dividend on June 29 of $1.50 per share. At current prices that’s a 10% yield to shareholders. Not sure about investing? Its free cash flow yield is 14.7%, double rival Accenture’s (NYSE:ACN).

Zipcar

Zipcar (NASDAQ:ZIP) shares have lost 58% since closing the first day of trading at $28 back on April 14, 2011. I feel for those poor souls who bought at the high. If you’re still holding, hang in there — better times are ahead. And if you’ve never owned its stock, you might want to consider it.

I live in Toronto, one of two cities in which Zipcar is experimenting with a monthly plan where, instead of paying the $65 annual fee, you can try the service for $6 per month for a six-month commitment. Obviously, the company is feeling the heat from the rental-car companies as well as Daimler(PINK:DDAIF), which have entered the car-sharing business. I think it’s a good idea for people like myself who don’t own a second car and haven’t looked at car-sharing because of Zipcar’s $65 annual fee. The $36 teaser rate has me giving the idea a second thought.

With excellent customer-service standards, management figures that once I test out the service, I’ll sign on permanently. You can expect this trial to be rolled out across its network, putting some zip in its membership growth. Although it’s still losing money on a GAAP basis, its non-GAAP adjusted EBITDA in 2012 is expected to grow by at least 60% to $16 million on revenue of $290 million. Zipcar’s business is moving in the right direction.

Air Lease

My final pick is Air Lease (NYSE:AL), which went public in April 2011 at $26.50 a share. As its name suggests, it leases aircraft to airlines like Southwest (NYSE:LUV), United Continental(NYSE:UAL) and many others around the world. Air Lease has been in business for less than three years and went public within 15 months of starting up.

As of the end of March, it had 48 new and 66 used aircraft in its fleet with a weighted-average remaining lease term of 6.9 years, providing it with lease income for many years to come. In many ways this business is like operating a bank. Air Lease makes money by charging more to the airlines to lease the planes than it paid to buy them.

As of July 3, its stock is down 26.8% from its IPO. With extremely healthy margins, I like its chances to rebound in the future.

Source:Investorplace