X Stock: U.S. Steel Will Withstand Global Tariffs
The U.S. stock market has been a whirlwind since February when we started a correction. This all came about from investors fearing a sharp rise in interest rates — specifically in the 10-year yield. This quickly subsided to a flurry of headlines about global tariff wars. Since the steel industry was in the middle of this crisis, U.S. Steel (NYSE:X) stock rose to the front of this hotly contested economic war.
President Donald Trump delivered on his campaign promises of better economic deals for the U.S., with NAFTA and China as the main targets. The steel industry, meanwhile, is among the more prominent stars on the global stage. Unfortunately for the sector, this was the start of a massive roller coaster ride in steel stocks.
While markets are setting new highs this morning, X stock is down 17% year-to-date.
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After a sharp 20% correction on Feb. 2, X stock rallied 50% due to the protectionist headlines. But this was short-lived as it quickly gave most of it back, and, for the past few months, it has been struggling to hold this year’s $30-per-share pivot zone.
Headlines matter over the short term, but usually, the price action happens based on technicals and fundamentals. This year’s stock highs coincide exactly with the highs of September 2014 and the ledge of June of 2011.
Left alone, X stock was doing well before the correction. It had just finished a 50% rally from $26 per share. And eventually, the headlines will die as the U.S. and China come to terms. The debate will go back to being one of fundamentals, and X stock has a good story to tell.
This morning, Morgan Stanley downgraded the stock to “underweight” and lowered its price target to $30 per share. This morning X stock is almost there. This suggests that the downside is limited even by those who are negative on U.S. Steel.
With a price-earnings (P/E) ratio of 12, this company is not expensive. Owning U.S. Steel shares, especially if at a discount, from current levels is not likely to be a major debacle. This tariffs war that has been fought on Twitter (NYSE:TWTR) will pass. But until then the price action is violent and unpredictable.
For now, it’s a series of binary events that are driving prices and not necessarily fundamentals. So instead of risking my money to own X shares without any room for error, I use options to place my trade. This way, I can build a buffer between the current price and my level of risk and this will protect me from short-term knee-jerk reaction to tweets and state media headlines.
With fundamentals hostage to headlines, I revert to technicals to best choose my risk. I am comfortable owning shares at a 20% discount from current price in today’s macroeconomic environment. Today’s economic activity reports in the U.S. are excellent, so X stock should continue to do well albeit fighting headlines and currency issues.
I have faith in downside support for U.S. Steel stock will hold through 2018. The Wall Street experts agree since X stock is trading well below their average price range.
The Trade: Sell X JAN 2019 $24 put and collect 75 cents per contract to open. Here I have an 85% theoretical chances that price will stay above my level. Else, I will accrue losses below $23.25.
Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell X JAN 2019 $24/$22 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade requires a rally to profit.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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