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Bull of the Day: AK Steel (AKS)

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It wasn’t long ago when steel stocks were a guaranteed way to lose money in the market. This sector is famously sensitive to the world economy. Steel is the backbone of products that generally fit into the durables space or construction. When the economy stalls, individuals, corporations and governments don’t make investments in this space, thereby hurting worldwide steel demand.

Now add the glut of cheap Chinese steel supply into the equation and the deck is stacked against you. That’s exactly what steelmaker AK Steel (AKS) had to deal with. As a result, last year’s numbers were ugly, very ugly. In fact, last year AK Steel lost 24 cents per share.

Well the past is the past and this year AK looks like a bona fide turnaround story for the ages. Estimates for this year call for AK to make between 30 cents and $1 per share. Analysts have been so bullish on the stock that in the last 60 days ten different analysts raised their estimate for the current year, and seven raised estimates for next year.

The story has been so good recently that AK Steel has surprised earnings to the upside by an average of 57% over the last 4 quarters. Early this week, news came that AK’s lenders decided to extend its $1.1 billion credit facility through March 2018, when it had been set to expire in April 2016. These are all signs that things are going well over at AK Steel.

A look at the price and consensus chart details the turnaround story. From 2009 to 2013, estimates were continually slashed for AK, helping send the stock on a rocky downward trajectory. It does appear, however, that the story is changing and growth is finding its way back into the AKS picture. If the earnings picture stays positive, this $6 stock could see double digits in a heart-beat.

The technical picture is setting up nicely for those that can be patient. The chart screams momentum as this was a $3 stock a short year ago. Since then we have seen a furious rally all the way up above $8 before settling down in the trading range just above $6 this year. The 25 day moving average shifted to the right by 5 (25x5 SMA) provided support throughout the entire bull run off the bottom. Recently price has found itself under this 25x5 SMA and has had a tough time rallying above it.

Currently AKS is hanging around the 38.2% Fibonacci retracement level from the lows last April to the high in late December. This is a good sign for the stock as it shows there are plenty of buyers camped out above $5. Any day now, you could see a break above the 25x5 on heavy volume which would give you a technical buy signal on this stock with sound fundamentals.

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