NEW YORK (TheStreet) -- Buying ArcelorMittal (MT) - Get Report and shorting AK Steel (AKS) - Get Report will likely generate more gains on a risk-adjusted basis than investing in any single steel stock.

The impact of the increasing costs of raw materials makes the steel sector suitable for

our long/short strategy


Seaborne iron ore prices zoomed 90% for the second quarter and

may further increase by 25% during the third quarter

. ArcelorMittal, with

45% self-sufficiency in iron ore at 100% utilization rate

and through long-term contracts with iron ore majors, such as

Cliff Natural Resources

(CLF) - Get Report


a metal stock pick for 2010

), may generate higher returns for investors.

On the other hand, iron ore price hikes may squeeze AK Steel's profit margins during the upcoming quarters. The company did not take into account higher iron ore prices in the second-quarter order book, which could trigger declines in the quarterly earnings, according to analysts at JPMorgan. In addition, iron ore price hikes in the third quarter may further diminish stock returns. In comparison,

U.S. Steel

(X) - Get Report

, with a captive iron-ore source, will likely

dominate other U.S. steel producers


During the past 12 months, the return on equity for AK Steel stood at -8.07% in comparison to ArcelorMittal's 0.20%. AK Steel is likely to report earnings of 66 cents per share in 2010, in comparison to earnings of $2.49 per share for ArcelorMittal, according to analysts polled by



AK Steel has two buy, nine hold, and no sell ratings, while ArcelorMittal has five buy, three hold, and no sell ratings, according to


Analyst ratings guide.

TST Recommends

Currently, ArcelorMittal is trading at an attractive PE multiple of 12.05, in comparison to AK Steel's 16.54. ArcelorMittal's EV to EBITDA multiple of 6.60 is above AK Steel's 4.59.

AK Steel and ArcelorMittal led the pack of steel stock decliners, sliding around 33.2% and 30.7% year-to-date, respectively. Other major steel producers,


(PKX) - Get Report


Steel Dynamics

(STLD) - Get Report

, U.S. Steel and


(NUE) - Get Report

, were down 20.9%, 20.4%, 18.4% and 10.5%, respectively, year-to-date.

Gerdau Ameristeel

( GNA) led the pack of steel gainers, advancing 33.7% year-to-date. The stock's gain is attributed to the 54.4% jump on June 2 alone, on

Gerdau SA's

(GGB) - Get Report

proposal to acquire a minority stake in the company. Other steel producers,


(MTL) - Get Report


Worthington Industries

(WOR) - Get Report



(TX) - Get Report

, gained around 33.7%, 17.1% and 5.4%, respectively, year-to-date.

Worthington Industries is a diversified metal processing company, Mechel is a Russian metals and mining company and Ternium is a steel producing and distributing company. Recent gains of these stocks may provide limited bargaining opportunity. However, ArcelorMittal stock, at the current price levels, will likely provide strong buying opportunities.