NEW YORK (TheStreet) -- Buying ArcelorMittal (MT) - Get ArcelorMittal SA ADR Report and shorting AK Steel (AKS) - Get AK Steel Holding Corporation 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
Seaborne iron ore prices zoomed 90% for the second quarter and
. ArcelorMittal, with
and through long-term contracts with iron ore majors, such as
Cliff Natural Resources
), 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,
, with a captive iron-ore source, will likely
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.
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,
, U.S. Steel and
, were down 20.9%, 20.4%, 18.4% and 10.5%, respectively, year-to-date.
( 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
proposal to acquire a minority stake in the company. Other steel producers,
, 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.