The Heavy Metal Index: Unstoppable Stocks

The Metal Industry has been on fire and with the unstoppable world wide demand for metal, there appears more room to gain for the best players.  The developing Nations need metal, and we've got your Heavy Metal Index in time for the weekend, Rock On.

First up, the ultimate Metal stock, United States Steel Corporation  (Public, NYSE:X).  These guys have been making steel for more than 100 years and they have more than 49,000 U. S. Steel employees around the world.  The big X has an annual raw steelmaking capability of 31.7 million net tons, they are more metal than Black Sabbath themselves. Just take a look at the one year chart, if only you had bet the farm, shares now stand at $168:

The best part is Wall Street wants U.S. Steel to fall and as we all know, some how they always end up winning.

Last month Citi Investment Research analyst John H. Hill cut his rating on the stock to "Hold" from "Buy," noting the recent increase and saying his $145 price target had been reached. (via Forbes.com)

"While spot-market momentum may continue to carry United States Steel (NYSE:X) shares higher, we believe the 'easy money' has been made," he wrote in a client note.

Nevertheless, Hill set a $160 price target because of rising steel prices and estimates of 2009 earnings.

That longer-term optimism for US Steel stems from three factors, he wrote. The analyst remains bullish on the current steel rally, and the company's domestic operations are fully self-sufficient in iron ore, an advantage with international prices rising. Also, the company also runs its own coke batteries, with metallurgical coal supplied under contract, a cost advantage in the carbon steel market.

Next up are some more affordable stocks, one that the Masters have talked up time and time again:

Metalico, Inc.  (Public, AMEX:MEA)  which is now at $15.

Zacks.com has been pimping MEA lately, they rank Metalico, a Zacks #1 Rank (Strong Buy) company. Saying they reported a record quarter as scrap metal prices soar on strong demand. The company has surprised on earnings on average of 17.95% over the last four quarters. Metalico's forward P/E is 14.36.

Our own Eric Cheshier (Master Co-Founder) has made a killing on this stock, last month he wrote: Don’t bet against Metalico, Inc.  and he was right.  The stock is up 134% in the last year.

(schaeffersresearch.com) With a market cap of just $470 million, MEA also stands out as a small company with room for growth. To that end, MEA recently completed its acquisition of Snyder Group, a multi-yard scrap metal recycling operation, for $69 million in cash and $7 million in common stock.

 Elizabeth Harrow said it best this week:

Despite MEA's undeniably strong price action, many investors and analysts have yet to jump on the shares. For starters, option players have barely had a chance to weigh in on the shares, since they became optionable just a few days ago. The equity's Schaeffer's put/call open interest ratio (SOIR) checks in at 2.0, indicating that there are 2 times more puts than calls among near-term options.

Before we get overly excited about this apparently mega-bearish reading, though, we should note that MEA's total, near-term open interest consists of 3 contracts: 2 puts, and 1 call. Looking out at longer-term options, there's a bit more activity happening in the October series. Here, the 12.50 call hosts peak open interest of 3,120 contracts. Meanwhile, there are 275 contracts open on the October 15 call, and this out-of-the-money strike has traded volume of 2,096 contracts so far today. Most of this volume should translate to new open interest tomorrow.

As MEA options continue to grow in popularity, it could be a boon for the shares as buyers find an alternative route to bet on the equity's uptrend. However, it's likely that these contracts will continue to be relatively illiquid for some time to come. Since a lack of liquidity can make it difficult for traders to enter and exit a trade at their desired levels, it might be best to shy away from these thinly traded options for now.

Finally, MEA could gain from a running of the bears. During the most recent reporting period, short interest on MEA ramped up by nearly 40%, and now accounts for about 9% of the equity's total available float. At MEA's average daily trading volume, it would take about a week's worth of trading days for all these bearish bets to be repurchased. As the stock looms near all-time highs, some of these short sellers might be forced into covering their losing bets to limit losses. A surge in short-covering activity is yet another factor that could benefit this under-the-radar security.

Then there's Industrial Services of America, Inc.  (Public, NASDAQ:IDSA) trading at $12.83.  They got a bump this week after Hilary Kramer mentioned them on the Nightly Business Report.  Hilary also likes MEA, here's what she had to say:

KANGAS: That's right. What are some of your favorites in the scrap metal area?

KRAMER: My favorite stock is Metalico. MEA is the ticker symbol. The composite price today was $13.70. Metalico which again, I've brought up many times before is a New Jersey based scrap metal recycler in the northeast, just made an acquisition of Schneider in New York state, a private company. We should see Metalico go from $13.70 to at least $20 if they continue to buy smaller scrap metal recycling companies. And of course, they themselves could be an acquisition target because there are a lot of big players that want to get into the northeast.

KANGAS: OK. You also like Simms Group, SMS on the big board. We have a chart up. KRAMER: Yes, SMS, $34 stock. Simms Group could easily go to $40 because here's an Australian company, trades here in the U.S., big $4 billion market cap but no sell side analysts cover the company, so you're buying undervalued companies simply because no one knows about it on the street.

KANGAS: How about another name quickly.

KRAMER: I like IDSA, Industrial Services of America. This is a very small cap company. It's a small cap gem, a top manager. The CEO there has been in the business for over 50 years. We could see some consolidation there. They're also in the ferrous and non ferrous area of scrap metal recycling.

KANGAS: And we have 20 seconds for one more.

KRAMER: Schnitzer, SCHN. Schnitzer is all the way up in the low 90s, but we could see Schnitzer go to $110. Schnitzer is a big exporter of the scrap metals. (INAUDIBLE) such demand domestically.

KANGAS: Quickly, do you own any of these stocks or have other disclosures to make?

KRAMER: I own all of these companies and am bullish on this sector.

Masters, for your cut & paste benefit, here are the tickers for the Heavy Metal Index:
X, MEA, ISDA, SMS, SCHN

Discliamer: No positions in any of the securities mentioned.