Options Transactions Signaling Steel Resurgence

Joe Kunkle, Investment U Research Team

Late last year, steel stocks saw some of the sharpest sell-offs in the market.

The Steel Market Vectors Fund (NYSE: SLX) fell from $114 to $20, and most steel producing companies hit five-year lows.

The interesting thing is that we’re seeing signals in steel stocks that are strikingly similar to what we saw in coal stocks and the Market Vectors Coal (NYSE: KOL) in late April.

At that time, investors saw a 43% jump in about 10 days.

Just prior to that jump, coal stocks were seeing bullish positioning and large institutional traders buying far out-of-the-money call options. A handful of investors and traders profited handsomely.

If this pattern holds true, and steel stocks behave is a similar fashion, investors who jump back in could see sizeable returns. And

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For Immediate Release

Chicago, IL - May 14, 2009 - Zacks Equity Research picks Transocean Ltd. (RIG) as Bull of the Day and Gerdau S.A. (GGB) as Bear of the Day. In addition, the analysts at Zacks Equity Research discuss the latest on Goldman Sachs (GS), JP Morgan Chase (JPM) and US Bancorp (USB).

Full analysis of all these stocks is available at: http://at.zacks.com/?id=2678

Bull of the Day

Transocean Ltd. (RIG) reported strong first-quarter 2009 results driven by solid contribution from the high-specification floaters and significant cost control measures. Transocean continues to generate significant cash flows supported by a $36 billion backlog, which is of a very high credit quality.

The company is deploying its ample cash flows to strengthen its balance sheet and invest in its newbuild program.

Our Buy recommendation remains unchanged, though we have lowered our estimates to reflect a relatively softer outlook for the mid-water

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We are maintaining our Sell recommendation on Gerdau S.A. (GGB) based on poor first quarter results and a huge decrease in demand for steel worldwide.

The huge decline in steel prices and the international economic slowdown creates a more challenging business environment for the steel industry. The company's strategy to grow through acquisitions based on debt is contributing to the negative news.

Moreover, huge exposure to the U.S. market during a recession is a major concern. Our target price is $5.75 per share. Zacks Investment Research

We highlight Gerdau SA ADR (GGB).Brazilian domestic steel production decreased 47.2% in February 2009 from the same month in 2008. February domestic production was just 0.8% higher than in January 2009. Steel sales for the construction business declined 42.3% year-over-year on February 2008.Below we can see a graph of the Brazilian steel production since September 2008 when the effects of the crisis became more apparent in Brazil:Brazilian Steel Production per Month - Millions of TonsThe steel industry has been facing lower volumes coupled with falling prices. At this point, no recovery can be taken for granted in the short-term. The business environment is particularly difficult for companies with huge U.S. exposure and higher leverage. Considering the recent numbers we are keeping our negative view on Gerdau SA ADR (GGB). Read the full analyst ...

Highlights include Telecomunicacoes de Sao Paulo SA (TSP), Companhia Energetica Minas Gerais (CIG) and Companhia Paranaense de Energia (ELP). We do not like cyclical stocks with excessive leverage like Gerdau SA (GGB).Some days ago we were discussing some signs of recovery in the Brazilian economy. Nevertheless, there were some negative numbers released last Friday. January industrial production increased 2.3% from December 2008. This number was negative as the market was expecting at least a 5% recovery; however, the real problem was that it represented a 17.2% decline if compared to January 2008. This number really raises some concerns over if there is really a recovery going on in Brazil, or if it was just some an isolated signs in the car industry.After this disappointing indicator, the market is now predicting economic growth in Brazil to be within the 0% to 1% ...

Highlights include Petroleo Brasileiro SA (PBR), China Petroleum & Chemical Corp. (SNP), Vale (RIO), Cosan Limited (CZZ) and Gerdau SA (GGB).China Continues to Pursue Long-Term Investments in CommoditiesYesterday, leading Japanese business newspaper Nikkei informed that China is considering a plan to use part of its US$2 trillion reserves to buy oil reserves and diversify its international investments, reducing the exposure to U.S. bonds. Currently 2/3 of the Chinese reserves are denominated in U.S. dollars.If this plan is approved, we foresee two direct consequences: (i) Oil prices should recover, leading the way to other commodity price increases, and (ii) the U.S. dollar should fall against international currencies like the Yen and the Euro, a development that would also be positive for commodities prices in general, since they are all negotiated in U.S. dollars -- thus a lower dollar would ...

Gerdau S.A. (GGB) is a leading steel producer in Brazil with operations in South America, North America and Europe. The company is also the largest producer of long steel in the Americas.

We are reiterating out Hold recommendation on Gerdau. The company has been posting good results, and the third quarter 2008 results were excellent. However, the recent decline in steel prices and the international economic slowdown creates a more challenging business environment for the steel industry.

The stock’s valuation seems attractive, even considering lower earnings for 2009. Nevertheless, huge exposure to the U.S. market during a recession is a major concern.

Read the full analyst report on GGB.

“GGB” Free Stock Analysis: Buy? Sell? Hold?Zacks Investment Research

Here are the stocks added to the Zacks #1 Rank ("strong buy") List today:

Ajinomoto Co Inc (AJINY) Alexza Pharmaceuticals Inc (ALXA) Alexion Pharmaceuticals Inc (ALXN) Amerisafe Inc (AMSF) APAC Customer Services Inc (APAC) Atmos Energy Corp (ATO) Bio-Reference Laboratories Inc (BRLI) Command Security Corp (MOC) Conmed Healthcare Management Inc (CMHM) Conseco Inc (CNO) Discovery Communications Inc (DISCB) Flanders Corp (FLDR) Gerdau SA (GGB) I-Many Inc (IMNY) Investors Bancorp Inc (ISBC) Jackson Hewitt Tax Service Inc (JTX) James Hardie Industries NV (JHX) Kaman Corp (KAMN) Labopharm Inc (DDSS) Mag Silver Corp (MVG) Metabasis Therapeutics Inc (MBRX) National Beverage Corp (FIZZ) NCI Inc (NCIT) Neogen Corp (NEOG) NeuroMetrix Inc (NURO) Nova Biosource Fuels Inc (NBF) Palatin Technologies Inc (PTN) Pegasystems Inc (PEGA) ...

The jury may still be out on how the $700-billion rescue package -- which has recently been agreed on by Congress -- will impact the economy, but for the time being, the broader market is lapping it up. And the joy is there for all to see in the steel sector, which has been under the whip for some time.

Shares of steel companies were hit last week when the Federal Reserve refused to change the benchmark federal fund rate. Add to it a strong dollar and slumping demands had led the likes of Arcellor Mittal (MT) to cut production. No wonder it was down around 3% on Tuesday.

But Arcellor Mittal is back with a bang on Thursday with an intraday gain of 7.53% till 1.20. But MT pales behind the 8.03% gain logged by Mechel Steel (MTL). Brazilian steel company Gerdau S.A. (GGB), too, is up 5%

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Here are the stocks added to the Zacks #1 Rank ("strong buy") List today:

Accenture Ltd (ACN) American Italian Pasta Co (AITP) ANSYS Inc (ANSS) Apollo Group Inc (APOL) BlueLinx Holdings Inc (BXC) The Brink's Co (BCO) Cemex SAB de CV (CX) Central European Distribution (CEDC) China Direct Inc (CDS) China Petroleum & Chemical Corp (SNP) Comfort Systems USA Inc (FIX) Euroseas Ltd (ESEA) FLIR Systems Inc (FLIR) Franklin Electric Co (FELE) Gerdau SA (GGB) Glacier Bancorp Inc (GBCI) Key Energy Services Inc (KEG) Kindred Healthcare Inc (KND) Parker Drilling Co (PKD) Patterson-UTI Energy Inc (PTEN) Peabody Energy Corp (BTU) Pixelworks Inc (PXLW) RadioShack Corp (RSH) Reliance Steel & Aluminum (RS) SJW Corp (SJW) St. Jude Medical Inc (STJ) Standard Parking Corp (...