Shares of United States Steel Corporation (US:X) are down almost 30% in the last 12 months, lagging even the declines in the Basic Materials sector. True, while there has been some upward movement in the past few weeks, we are seeing signs that it may be the right time to move into this name.
Our read of the data on Fintel’s dashboards — particularly those tracking quality, value, favorable sentiment, and a series of positive EPS surprises — indicate that for patient, long-term investors X stock could deliver outsized returns.
I argue that patience separates wise and sophisticated investors from gamblers and speculators, and defines investment success over time. After all, without patience, investors are very likely to never achieve consistent long-term profitability. Erratic investment decisions without patience and logical arguments are simply a way of investing with emotions and ego, which in most cases ignore completely the virtue of patience.
Model for Patience
One of Fintel’s Quant Models, namely the Quality + Value + Fund Sentiment model, displays stock analyzed for their suitability for long-term, patient investors who want maximum returns over the long term. By adding the Fund Sentiment, or Ownership, factor, the enhanced quantitative model builds on the results of the original Quality/Value model.
That original Quality + Value Scoring Model (also known as the QuantSoft Score) was developed by Fintel founder Wilton Risenhoover and is based on his research while at UCLA Anderson School of Management. The original Quality + Value Score is a six-factor model that ranks companies on their cash-generating ability and growth. Additionally, there is a significant value factor in it. It identifies very good, durable companies with a large moat that have fallen into disfavor by the market and are likely to recover.
The original Quality + Value score was analyzed by an independent firm; they found that an investing strategy based on the scoring model outperformed both the Russell 2000 and the S&P 500 indexes over time. In one test, assessing the period from 1992 to 2013, the theoretical compound annual growth rate of the Quality + Value score was 20.73% vs. the Russell 2000 CAGR of 10.33%. In that analysis, the Sharpe Ratios were 0.91 (Q/V) vs. 0.46 (R2000) and the Sortino Ratios were 1.18 (Q/V) vs. 0.48 (R2000). Returns for specific years are provided in the attached chart.
This enhanced QVO Scoring Model adds two more factors, both based on measures of fund sentiment. The addition of fund sentiment factors to the traditional Quality + Value score provides a slight boost in the ranks of companies that have high accumulation by institutions and are expected to improve returns over the long term (although this has not been tested).
Plenty of Quality
As an investment rule, quality stocks are defined as having high and stable profitability and low financial leverage. The shares of United States Steel have a Quality Score of 91.53 (ranking 590 out of 12,109 analyzed), a Value Score of 95.71 (877 out of 22,730), and a Momentum Score of 93.15 (4,534 out of 43,121).
The return on equity and return on assets financial metrics, although they have exhibited volatility, have both shown improvement since June 2021. The ROA ratio has doubled to 0.14 from 0.07 back in June 2021 while the ROE ratio has increased to 0.28 from 0.25 for the same period.
The steel company has shown a positive trend in revenue, operating income, and net income in that period, something that was evident in the fourth-quarter 2022 earnings, when X stock investors earned $9.16 per diluted share versus $3.71 for the June-end quarter in 2021.
At the same time, it is very positive that United States Steel for the period 2011-2022 consistently increased its stockholders equity while without increasing its long-term debt. The result was a very strong year-end 2022 balance sheet, with a debt-to-equity ratio of 0.38.
Value at Deep Discount
Heading now into the second quarter, X stock sports a P/E ratio of 2.88, a price-to-book ratio of 0.58, and a price-to-tangible book value ratio of 0.67. Combined, these financial metrics make the stock seem relatively undervalued.
The EBIT/EV ratio of 0.50 confirms this value feature. Looking at the Cash From Operating Activities, the company has improved a lot its cash generation from its core business activities, from $1.60 billion for the period ending June 30, 2021,to $3.51 billion for the three months ending on Dec. 31, 2022.
That improvement may be just one of the reasons why US Steel stock has a very high Fund Sentiment score of 87.40, (ranked 2,344 out of 36,680). That the Fund Sentiment score, or the Ownership Accumulation score, finds the stocks that are being most bought by funds. It uses a sophisticated, multi-factor quantitative model which identifies companies with the highest levels of institutional accumulation.
The scoring model uses a combination of the total increase in disclosed owners, the changes in portfolio allocations in those owners, and other metrics. The number ranges from 0 to 100, with higher numbers indicating a higher level of accumulation than its peers, and 50 being the average.
Of the 840 total institutional owners of X stock, 785 are long only, 14 are short only, and 41 are long/short.
Bullish Big Beats
United States Steel has reported EPS beats in 15 of the last 19 quarters, which is an impressive track record. Companies that can consistently deliver positive EPS surprises have higher odds of witnessing seeing stock prices move higher.
It is scheduled to report first-quarter 2023 earnings before the market opens on April 28.
Positive earnings surprises can have a huge impact on a company’s stock price, which is supported by several studies. These studies have shown that positive earnings surprises not only lead to an immediate hike in a stock’s price, but at the same time to a gradual increase over time.
In sum, United States Steel stock has a very positive combination of qualitative factors that could send the X share price to higher levels, rewarding patient investors in their decisions.
This article originally appeared on Fintel
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