According to a Form 4 filed with the SEC, Murry Gerber, a member of the Board of Directors at United States Steel Corporation (NYSE:X), directly acquired almost 13,000 shares of the company’s stock on May 8th at an average price of $18.50 per share. We track insider purchases because, in theory, insiders should be quite hesitant to increase their company-specific risk in this way. Unless they have a good deal of confidence in the stock, it is rational for them to diversify instead. Studies somewhat back this up, showing a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading).
United States Steel Corporation (NYSE:X) is down 90% from its levels five years ago, including a 27% decline in the last year. In the first quarter of 2013, its revenue declined by 11% versus a year earlier as the demand for steel- which is closely tied to overall macro activity (as shown by the stock’s beta of 1.8)- has continued to be low as China slows down somewhat and growth in Europe continues to be stagnant. Operating income also declined if we add back a loss on disposal of assets to the first quarter of 2012, and with U.S. Steel’s interest expenses taken into account the company was unprofitable for the quarter. Cash flow from operations was about $230 million, down from a year ago but enough to cover capital expenditures.
Wall Street analysts are predicting a poor 2013 for United States Steel Corporation (NYSE:X) but then a strong recovery in the following year- specifically, the forward P/E is 12. Of course, we wouldn’t want to rely entirely on sell-side forecasts (which often tend to be too rosy) but we can at least see where the insider purchase is coming from- an agreement that business conditions will improve. Interestingly, earlier this month we had found several company insiders at Walter Energy, Inc. (NYSE:WLT) buying stock; Walter Energy, Inc. (NYSE:WLT) is a major producer of metallurgical coal, which is used in the production of steel, and that company has been struggling over the past couple years as well.
In addition to insider trading activity we also follow quarterly 13F filings from hedge funds and other notable investors; we use this information to develop investing strategies (the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and to track interest in individual stocks. According to our database, Renaissance Technologies (which was founded by billionaire Jim Simons) owned almost 2 million shares of United States Steel Corporation (NYSE:X) at the end of December (check out Renaissance’s stock picks). Billionaire David Shaw’s D.E. Shaw reported a position of 1.4 million shares (find D.E. Shaw’s favorite stocks). However, a number of market players are bearish on United States Steel Corporation (NYSE:X) with the most recent data showing 29% of the float held short.
We can compare U.S. Steel to ArcelorMittal (ADR) (NYSE:MT), AK Steel Holding Corporation (NYSE:AKS), and Nucor Corporation (NYSE:NUE). ArcelorMittal (ADR) (NYSE:MT) and AK Steel Holding Corporation (NYSE:AKS) are priced at a small discount to the company, with forward P/Es in the 9-10 range, though they too have been struggling recently. Last quarter AK Steel Holding Corporation (NYSE:AKS) reported that its revenue had fallen by 9% compared to the first quarter of 2012, and ArcelorMittal (ADR) (NYSE:MT) was recently forced to cut its dividend. They’ve each seen at least a 20% decline in price over the last year as well. Nucor Corporation (NYSE:NUE), like United States Steel Corporation (NYSE:X), trades at 12 times forward earnings estimates. It is actually profitable, but experienced double-digit percentage declines on both top and bottom lines in its most recent quarter compared to the same period in the previous year.
We’re certainly very wary of investing in United States Steel Corporation (NYSE:X) or any company tied to steel at this time, but the insider activity which we are seeing is at least somewhat suggestive that company insiders believe that the sell-side is onto something. The purchases shouldn’t serve as the only reason for investors to actually put money into steel related stocks but we’ll be sure to monitor future developments in the industry including any more insider buys.
Disclosure: I own no shares of any stocks mentioned in this article.
