Top Ten Most Shorted Stocks: AK Steel
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A recent survey of the top ten most shorted stocks in the S&P 500, found AK Steel (NYSE: AKS) coming in at #6. The company currently has about 20.66% of its outstanding shares sold short. My contrarian nature makes me think there might be opportunity where others see problems. Let's look at AK Steel a little more carefully and see what's going on.
AK Steel
Current Price: $8.16
P/E based on '12 earnings: 10.74
Growth expected: 14.88%
PEG: 0.72
Yield: 2.45%
AK Steel is in a similar position to U. S. Steel which I profiled here: http://beta.fool.com/mhenage/2012/02/10/top-ten-most-shorted-stocks-u-s-steel/1870/. In summary, both AK Steel and U. S. Steel are cash flow negative, and the shorts have a good case for continuing to short the stocks. With AK Steel specifically, the company is currently off its 52 week high by over 50%. While the easy money has already been made, there are still quite a few reasons to continue to be negative on the future outlook of the company.
When it comes to earnings, to say AK Steel has been having a tough time would be an understatement. The company has seen earnings shrink by over 40% in the last several years. Even though earnings estimates have been revised down for full years '12 and '13, the company can't see it hit the analyst targets. The company has missed estimates in 3 of the last 4 quarters by an average of 89%!
When it comes to the company's cash flow, the picture here isn't pretty either. AK Steel has shown negative average cash flow of about $130.8 million in the last 4 quarters. The company is telling the market there are problems by both issuing more shares, and taking on more debt in all 4 of the last 4 quarters.
While AK Steel's balance sheet isn't as bad as it could be, the current debt-to-equity ratio stands at about a 1. The obvious problem is if the company continues to take on new debt each quarter, the balance sheet will continue to deteriorate. With negative cash flow, a continued increase in debt would make it more expensive to get financing leading to lower profits down the road.
At some point in the future, it seems AK Steel is going to have to either cut or eliminate their dividend. There is no way that the company can continue to issue new shares, and borrow money to meet their expenses while maintaining the dividend. This will either be management's decision, or the continued red ink will force their hand.
When it comes to competition, AK Steel competes with one of the other top ten shorted stocks in U. S. Steel. The most formidable competitor that AK Steel faces though is Nucor (NYSE: NUE). Nucor seems to have everything going for it that these two struggling steel companies do not. Nucor sells for about $44.46 which gives it a forward P/E of about 14. The company is expected to grow at over 20% in the next few years, and pays a healthy 3.28% dividend. Unlike AK Steel, Nucor is cash flow positive and its dividend is only using about 50% of cash flow.
With negative cash flow, a deteriorating balance sheet, and unrealistic earnings projections, AK Steel looks to have further down to go. While the easy money has been made, the shorts still appear to have the right side of this trade. I'm placing a red thumbs-down on CAPSCall on AKS. Let me know in the comments section below what you think.
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