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

Why Playing Gold Is a Dangerous Game

You can't rely on Fed policy to push prices higher anytime soon

Gold’s extraordinary run over the past few years has made bulls a lot of money, especially if they held the metal as part of a diversified portfolio. Otherwise, trying to game the market has been a fool’s errand. Wednesday’s announcement by the Federal Reserve shows just why that’s the case.

The general theory behind gold is that it responds inversely to the dollar’s behavior, and that one reason for its meteoric rise has been that it serves as an inflation hedge. Theoretically, all the money our government has been printing makes the dollar worth less. The less the dollar is worth, the more expensive goods become — also known as inflation.

Therefore, anything that has intrinsic value — such as a precious metal — should theoretically become worth more. This theory probably has a good deal of merit when you consider the multiyear run gold has had.

The Fed’s quantitative easing policy prints money so the central bank can buy bonds, thus driving down interest rates. It’s that printing of money that got gold bugs excited. They were hoping the Fed would continue that policy, but instead it decided to just continue with “Operation Twist.” This is where the Fed simply swaps short-term bonds for longer-term ones. It doesn’t actually change its balance sheet, thus it’s not inflationary.

So gold sold off, just as it did when the Fed first announced Operation Twist. It opened yesterday at around $1,610, then dropped to $1,590. Then, however, buyers stepped in and pushed the price as high as $1,620, before settling flat. And that’s the problem with trading gold these days.

So what’s an investor to do?

The first is to understand that numerous crosscurrents are at work in the gold market. There’s always the issue of supply and demand. And some of it is psychological, tied to the overall state of the global economy. That bias is certainly to the bullish side, and will remain there for some time to come.

The supply/demand side of the equation is harder to peg, because you could read a dozen different reports on gold every day and find this variable is far too difficult to actually forecast. That’s why I don’t put much stock in that part of the assessment — because nobody seems to agree on it. So I discount that.

As for the inflation angle, we’re already seeing it in a bad way, it’s just that rising prices are being hidden. Still, given gold’s huge run, it may be that this factor is already discounted in gold’s price. So there may be some slight bullish bias here, but not much.

The Fed may yet do another round of quantitative easing, but it’s not likely to make a move until after the election. If Romney wins, we may get a new face at the Fed, so this remains a big variable. I suppose the bias here is bullish for gold, if anything.

It’s possible that Europeans will start buying the dollar if instability continues across the pond, which would be bearish for gold.

So, if you put it all together, there’s probably still a slightly bullish bias at play here. I think the safest way to play gold — if you insist on playing — is to just buy the SPDR Gold Shares (NYSE:GLD) as part of a diversified portfolio, and decrease that position if and when the world is in a better place economically.

You could also purchase the Market Vectors Gold Mining ETF (NYS:GDX), which removes you from direct exposure to gold prices, but exposes you to the operational risk for these companies. That’s why you get an ETF, though, to spread that risk.

You could also do my favorite play, which is to buy companies that profit from gold’s high prices — the pawnshops. First Cash Financial Services (NASDAQ:FCFS) and EZCORP (NASDAQ:EZPW) make fantastic margins when people come to their stores to sell their gold outright, and they make great margins if people pawn a gold item and fail to redeem it. They turn it into scrap.

Both of these stocks are significantly undervalued and not even close to being totally dependent on gold as revenue sources.

But whatever happens, don’t just trade gold on the technicals. I’ve tried this several times, and was convinced I’d have a winning trade this time around in May. I was dead wrong. Thank goodness for stop loss orders!

Source: InvestorPlace

Microsoft Tablet: Stock Winners & Losers

Who Fits Into Microsoft’s Surface Ecosystem?

You have to give credit where it’s due. Though Microsoft (NASDAQ:MSFT) still is nowhere near toppling Apple (NASDAQ:AAPL) as the king of cool consumer technology, the recently unveiled tablet/laptop hybrid called Surface is going to be an interesting competitor in the red-hot tablet race.

And from an investor’s point of view, one has to be thinking ahead about the fiscal impact that could be made by Surface — if consumers welcome it with even just partially open arms.

See, like Apple’s iPad, most of the guts and assembly of Microsoft’s new portable device isn’t something Microsoft actually makes or does. It pays other companies to come up with those solutions. Given the way Apple’s iPads and iPhones have dragged so many component makers along for the ride, though, solid demand for Surface could translate into solid demand for its suppliers. The question is, who wins and doesn’t win if Surface gets traction?

Winners

The consumer-oriented model that runs WindowsRT is presumably going to be powered by a microprocessor and chipset built by ARM Holdings (NASDAQ:ARMH) and Nvidia(NASDAQ:NVDA), which most likely means a Tegra central processing unit will be the brains of the lower-end device. The Surface Pro, which will be operated by Windows 8, will be using a Core i5 CPU, which is made by Intel (NASDAQ:INTC).

It’s not just about the processor, though. The device offers a touchscreen display, which requires a certain caliber of input-handling. That’s potentially good news for Cypress Semiconductor (NASDAQ:CY), which already is powering other devices running Windows 8.

Of course, these are just educated guesses based on existing supply and manufacturing relationships. Nothing is set in stone yet, and the company has dropped few hints about what’s under the hood of the newly debuted tablet.

Losers

As if the onset of the tablet era wasn’t frustrating enough, Microsoft just drove the proverbial dagger into the backs of Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL).

How so? Although these outfits have watched PC and laptop sales decline for several years now, there was at least some solace knowing they’d each be coming out with a tablet that was run by Windows 8, keeping them relevant somewhere between their prior roles as kings of computers and their contended role as tablet makers. Now, though, it’s not clear whether Microsoft is going to give them leftovers from the launch of their own tablet business.

It’s a risky maneuver from Microsoft, to be sure. Though it’s a fading business, PCs and laptops still are selling, with most of them being operated by Windows. If Microsoft undercuts them on the tablet front, will these PC makers maintain their enthusiasm about a pre-installed Windows OS? (Sadly, they might have little choice but to just suck it up, though it’s clearly more PC and laptop competition they didn’t need.)

Bottom Line

Assuming this list of winners and losers is essentially on target, the next question is, how big will the benefit be if Surface tablets actually make a dent?

Unfortunately, it’s a question of degrees: It depends on how strong that strength is. We do have some perspective, though.

In 2011, STMicroelectronics (NYSE:STM) nearly doubled its revenue — from 2010’s $353 million to last year’s $638 million. How? The company sells the electronic gyroscope found in the iPhone and iPad. It’s the hardware that makes the screen image flip from portrait (up and down) to landscape (side to side) when the device itself is turned sideways or right-side up. It’s not a new technology, but the gyroscope didn’t become a prolific seller for STMicroelectronics until it became standard last year’s on Apple’s hot-selling tablets and phones.

Skyworks Solutions (NASDAQ:SWKS), which makes mobile broadband technology, is another iPad explosion beneficiary. Granted, it doesn’t exclusively supply to Apple. It’s growing at least in part because mobile broadband connections are growing universally, from 500 million subscribers a couple years ago to a projected 2.5 billion by 2014. But, let’s face it: The iPhone is leading the charge, and that’s good news for Skyworks. Revenue has soared from $802 million in 2009 to $1.4 billion last year, and better still, profits are growing even faster than revenue, reaching $226 million in 2011.

Yes, those are a couple of cherry-picked extreme cases, and suppliers that have customers other than Apple won’t see improvements as dramatic as those. Every little bit helps, though.

That being said, the reality is — for the time being — there’s more we don’t know about who’s making Surface components than we do know. Intel, ARM and Nvidia are the frontrunners, but it’s the more obscure suppliers that could see the biggest (relative) benefit.

Of course, all this is moot if Surface doesn’t sell well. Let’s at least give it a chance to break into the market.

Source: InvestorPlace

Scan the Supermarket Aisles for Stocks

One value, one speculative and one niche for the grocer in you

I am not a fan of supermarkets these days. While they desperately fight off challenges from stores like Dollar Tree (NASDAQ:DLTR) and the organic juggernaut that is Whole Foods Market(NASDAQ:WFM), they still continue to lose market share.

That’s why I became intrigued by other niche players and think there’s value there to be explored. Let’s check in and see how these markets are doing.

Casey’s General Stores (NASDAQ:CASY) is an intriguing 53-year-old, 1,700-store chain that also operates under the names HandiMart and Just Diesel and stretches across 11 states (but is mostly located in Iowa, Missouri and Illinois).

Casey’s carries all the things you’d expect at a convenience store, but it also offers pizzas, burgers and breakfast items. So it’s like a combination of convenience store and Denny’s(NASDAQ:DENN). The best way to get a feel for the chain is to visit its website One of Casey’s primary advantages is its rural locations, which protects it from competition.

The company’s revenue soared last year, up 24% with earnings up 35% after backing out charges associated with fending off an attempted acquisition. CASY’s fourth quarter was tough, though, as gasoline margins were tight, despite a 13% overall revenue increase. With growth of 13% to 15% going forward, the stock is pricey. Still, it has much better prospects than others.

SuperValu (NYSE:SVU) has been struggling for quite some time. While growth has been anemic, it’s forgivable because the company is undergoing a turnaround. The focus has been on reducing debt, and the company has one big thing going for it: lots of free cash flow. Last year, SuperValu’s FCF was almost $400 million, and this year it’s projected to reach $450 million. CEO Craig Heckert is pledging to use most of it to reduce SVU’s debt from current levels of $5.87 billion, but that’s still a heck of a lot of debt to deal with — and being carried at 9%, no less.

For a while, I thought the 35-cent yield wouldn’t be sustainable, but it’s only $74 million annually, and that won’t make a dent in the debt anyway. Better to keep dividend investors on board. I think SuperValu might just be a speculative buy, but it assumes that free cash flow will stay consistent, and that the company can remain competitive in an increasingly hostile environment.

Given said environment, I’m impressed by Kroger’s (NYSE:KR) ability to keep growing. Total sales for Q1 were up 5.8% and same-store sales were up 4.2%. As other markets struggle, Kroger has managed consecutive same-store sales increases for the past eight-and-a-half years. The company lifted guidance 3% to $2.40 per share for the year. That puts the company at 9.5 times earnings and a long-term growth rate of 10%. When you factor in the 2% dividend, Kroger actually is a modest value play.

Source: InvestorPlace