A Steel Pick Revisited

By Dr. Duru written for One-Twenty

February 28, 2006

One reason I do not like to give advice to buy or sell stocks is that conscience compels the recommender to notify readers of change in opinion or of heart or of situation. Well, on February 10, I sounded the trumpet of validation when Jim Cramer ("Kramer") claimed that the steel industry will profit from the increased build-out of infrastructure in the oil patch. I made this call even as the Fed made it clear that it is now targeting the run in resource prices. Sure enough, resource stocks (commodities really) have been spending a lot of time sliding downhill while the market tries to price in the likelihood that the Fed will succeed. Of course, there have been many other factors, but in general simplified terms it seems the world is awash in oil and geo-political risks are primarily responsible for keep prices aloft this high. Jim Jubak wrote an excellent article on the prospects for oil-related stocks last week. I was convinced enough to just grit my teeth and gnash through the pain. But I digress a bit....

My steel pick was LSS. Since I admitted as much, the stock lost 6%, gained it all back, and is now headed back for another dance with its 200 day moving average. The ride has been stomach-churning to say the least. But imagine my surprise when I pulled up the chart of competitor Maverick Tube (MVK) to find that its stock has been relatively immune to the manic behavior of almost every other stock in the oil patch! I posted the current charts of both LSS and MVK below. I scaled them down for easier comparison:

Lone Star Tech
Maverick Tube

Notice that while LSS has sunk and stunk this month, MVK has sunk and popped right back to all-time highs. LSS has visited all-time highs three times since September, but has struggled otherwise. It is almost as if the two stocks have traded relative stregnth in the past nine months: one does well, while the other struggles. However, I just could not understand this recent set-up. I did a quick scan of the fundamentals like cash flows, revenue and profit growth, debt, and valuation. LSS looks likes like a winner on all counts. So, clearly, there is more to this story that I am missing. I have not found the hole yet, but in the meantime, I remain positive on this sector (see disclaimer here). Perhaps the next round of earnings will clarify things for me.

In the meantime, you should also check out an interesting curiosity: the financial stocks have been going in the exact opposite direction of the commodity stocks. TraderMike points out that the index that tracks financial stocks is at an all-time high! It is as if the market is trying to predict both an end to the Federal Reserve's campaign of interest rate hikes and the accompanying miracle of an end to inflation. You faithful readers know that I continue to wonder why inflation does not seem to show up more strongly in the official numbers. Fleckenstein continues to count obfuscation as a culprit. Whatever is going on, it is very strange. It ranks right up there with the long amount of time it took for the market to respond to the Fed's campaign to drive itnerest rates to zero and the currently long amount of time it is taking for the market to sink in the face of rising rates. One more thing (conundrum?!) to keep an eye on!

Be careful out there!

DrDuru, 2006