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Higher beta stocks such as U.S. Steel

United States Steel (X) has had a major turnaround recently, beating EPS estimates on five straight earnings reports. The last three quarters the company has turned a profit after a stretch of four consecutive losses. Regardless of the strong results the stock has fallen 30% from the September 17th high of $46.55 and is now only up 10.94% year to date. Higher beta stocks such as U.S. Steel combined with the broader market weakness from the same time period is setting up for a buying opportunity in the $4.7B Pittsburgh-based steel producer.

Not only has U.S. Steel topped Wall Street estimates for the last five quarters, but the beats have been by an average of $0.31 per share. In just the last three months, FY14 and FY15 EPS estimates have soared to $2.56 from $0.98 and $3.06 from $1.98 per share, respectively. The latest correction has the stock trading at a low valuation when you factor in the growth. X shares are now trading at a P/E ratio of 12.71x (2014 estimates) with 330.6% EPS growth and a P/E ratio of 10.64x (2015 estimates) with 19.5% growth on a year over year basis. Top line growth will be minimal at 1.1% next year following a 2.5% increase in revenue this year, but nonetheless is starting to move in the right direction. Totals were slightly lower in Q2 at $4.40B vs. $4.43B in the year ago quarter; they still beat estimates of $4.12B. For the first two quarters of the year, flat-rolled average steel prices per ton were $767 compared to $722 per ton in 2013.

Along with the current volatility in the forex market, U.S. Steel investors may have some concerns with the recent World Steel Association forecasts of just 2% global steel production in 2014. This would be nearly half of the 3.8% increase from last year. However, the NAFTA countries are still the bright spot with expected growth of more than 6% this year. Europe as a whole won't be at NAFTA production levels for this year, but should still be in the 3-4% range for about 1/6 of U.S. Steel's business (USSE).

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