U.S. Steel Short Sell Synopsis
US Steel's stock had realized a meteoric rise in 2016 (over 300%) and continued to trade positively in early 2017. The stock had been trading/valued based on positive views of the company's ability to increase revenues from rising steel prices while lowering operating expenses due to increased operating leverage. After a very difficult year of falling steel prices in 2015, the industry began to recover. As a result, steel prices increased and operating leverage helped profitability increase. This led to very positive consensus views given the lows the entire industry was experiencing in 2015. With Trump's $1 trillion infrastructure promise, US Steel's stock doubled in November 2016 after already being up 150% up to that point.
In order to better understand the underlying supply/demand factors that would drive US Steel's performance, we conducted the following investigative tasks:
Held in-depth discussions with management and competing firms
Held in-depth discussions with industry consultants and coal mine managers in Australia
Analyzed the steel input requirements of the FAA, FHA, and IHS for infrastructure projects
The results of our research found that the tailwinds for US Steel (steel prices, low coal prices, protectionist policy, and infrastructure spend) had largely been realized. We found that US Steel was facing substantial headwinds from falling steel demand, stable steel prices, wildly increasing met coal costs, no near-term infrastructure spend, and no new meaningful protectionist policies. The catalyst for this recommendation occurred when US Steel reported their Q2 2017 earnings in April 2017. As a result, the stock had its biggest one day decline in it's history as a public company. The stock has since traded significantly down from January 2017 levels.