US Steel Investors Need To Know About A Catalyst Coming In January

One of the most vocal  United States Steel Corporation X 2.14%bears on Wall Street finally changed his tune this week, upgrading the stock from Sell to Hold. On Friday morning’s PreMarket Prep, Axiom analyst Gordon Johnson said U.S. Steel has a major catalyst coming in January that could potentially drive the stock’s share price much higher.

“The reason why we got out of the way now is because you have a Section 232 case that is going to be determined by January 15, 2018—Trump is going to make a decision,” Johnson said.

President Trump has ordered an investigation into the potential risk that U.S. steel imports pose to national security, the groundwork for him potentially using his Section 232 powers to restrict steel imports.

What’s Behind The Recent Run

U.S. Steel stock has soared 54 percent in the past six months despite the fact that the company’s free cash flow dropped from $304 million in the second quarter to only $128 million in the third quarter.

“The key with U.S. Steel, in our view, is looking at their free cash flow, and their free cash flow this year, the Street is modeling it down 50 percent versus last year. Yet it seems like investors don’t care about that dynamic right now,” Johnson said.

He said much of U.S. Steel’s recent outperformance is due to investor confusion about an accounting change included in the most recent report and optimism about the U.S. Commerce Department’s aggressive tariff ruling on Vietnamese steel imports.

A Dangerous Short

Johnson said the underlying fundamentals of the U.S. steel market remain weak, but there’s too much Section 232 upside risk at the moment to sell the stock.

“We want to get clarity on this Section 232 case…and I think then we’ll be in a better position to reevaluate how we feel on the stock,” Johnson said.

Despite the major gains in the second half of the year, U.S. Steel stock is down 3.4 percent year-to-date.