This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best...
Just weeks after an analyst at Axiom Capital announced it was initiating U.S. Steel (NYS: X) with a sell rating, America's steelmakers are getting bloodied once again this week, pricked by a wide-ranging set of downgrades from analyst Dahlman Rose. Worse: While Axiom targeted USX in particular, Dahlman's downgrades touch on pretty much every steelmaker in the business.

ArcelorMittal (NYS: MT) and Nucor (NYS: NUE) , Steel Dynamics (NAS: STLD) and USX -- all four of these stocks got their buy ratings yanked yesterday, as Dahlman downgraded to "hold." Worst of the bunch is AK Steel (NYS: AKS) , which, according to Dahlman, no longer merits even a hold rating, but got dropped all the way down to "sell."


Why sell now?
It raises the question: Is Dahlman out of its mind? After all, quoted prices for hot-rolled steel are up nearly 14% since early July, which should be good news for steel companies. Indeed, as the price of their product rose, shares have been rising in tandem. But perhaps not for long.

Dahlman believes that "the next move in steel prices will be lower. Recent domestic price increases have not been matched internationally, potentially inviting increased imports later this year and placing a de facto ceiling on domestic prices." The only thing Dahlman sees as potentially saving the industry from a downturn would be a "curtailment" in steel production in China, or an increase in international demand.

All eyes on China... and Australia
Now granted, it's possible Dahlman will get its wish. Earlier this week, Australian super-miner BHP Billiton confirmed that it's scaling back the scope of its mining expansions, citing the end of the global "boom" in commodities. That sounds like code for "China isn't buying as much iron as we had hoped it would." And if this is the case, it could signal a cutback in the demand for iron ore... due to "curtailment" of Chinese steel production.

The real question is whether this hypothetical curtailment is big enough to eliminate a supply glut in global steel production. If it isn't, all the steel demand in China may still not be enough to sop up its excess production. In which case the excess will move into international supply streams, and eventually float its way to U.S. shores -- putting a cap on the prices U.S. steelmakers can charge, just like Dahlman says will happen.

Foolish takeaway
The situation's dynamic, with many moving -- and often contradictory -- parts. (That's just the way cyclical commodity markets work, so get used to it.) Now more than ever, investors need to focus on not overpaying, just in case the market decides to zig when any logical investor is convinced it should have zagged.

To help you with that, here's your latest rundown of who's who in U.S. steel today... and how much they cost:

Company

P/E

Price-to-Free Cash Flow

Growth Rate

ArcelorMittal 112 200 26%
Nucor 22 112 8%
Steel Dynamics 18 21 10%
U.S. Steel N/A 28 5%
AK Steel N/A N/A 5%

Source: finviz.com.

According to our Fool analysts, there are at least three Dow stocks dividend investors need, and not a one of them is a steel stock -- for good reason. As you can see, there's very little to like in these numbers. For the time being, at least, savvy investors will heed Dahlman Rose's warning and avoid steel stocks in general.

The article This Just In: Upgrades and Downgrades originally appeared on Fool.com.

The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services have recommended buying shares of Nucor, but Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 283 out of more than 180,000 members. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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