Should We Sell These Materials Stocks?

Should We Sell These Materials Stocks?

Materials stocks have had a pretty good run over the past six months or so due to a variety of factors, but mainly I think people are starting to realize that companies like U.S. Steel , AK Steel , and Walter Energy aren't going out of business anytime soon. When a rally like this happens, it's only natural for investors to wonder whether it's time to take profits and run, or if there are still more gains ahead. There is no easy answer to this, but let's see where things stand with these companies and what the next move could be.

U.S. Steel: big writedowns and management overhaul
Since the lows of under $16 per share earlier this year, U.S. Steel has rallied tremendously, and is actually up by about 30% in the past two months alone. As the heading suggests, the recent headlines involving U.S. Steel concern either its management changes or the $1.8 billion writedown that was recently announced (Keep in mind that the company's market cap is less than $3.5 billion).

The underlying problems are yet to be resolved, however. There is still a great deal of overcapacity in the industry, and while steps are being taken to change this, we're not out of the woods by any means.

Another thing to keep in mind is that steel stocks tend to perform extremely well in the fourth quarter of any calendar year. This pattern has been discussed in detail by the media, and may be part of the cause of some recent short covering. Once the industry gets its act together in terms of supply and demand, the direction should be up, but that's a very vague time frame.

AK Steel: Will the most risk produce the most reward?
AK Steel faces the same issues as U.S. Steel, but has a more drastic problem with its pension costs. In short, the company needs interest rates to begin to rise to help lower its funding obligations. Basically, pension funds put their money in various investment vehicles, and use the returns from those investments to pay their obligations. If interest rates are very low (like they have been for a few years), returns will be low and the company is obligated to make up the difference. It is also worth noting that U.S. Steel has similar problems, just not to the extent that they are plaguing AK Steel.

Because of this, AK Steel should resume its upward trajectory once interest rates begin a steady climb. For the time being, AK Steel has already corrected significantly from its recent highs, but is still up around 50% from its lows.

Walter Energy went from a $190+ takeover target to this?
Even though it has barely been two years, it seems like ancient history to think of when Walter Energy was widely speculated as a takeover target at an expected price in the $190 range. As a result of the speculation, and the ensuing dumping of shares once it didn't happen, Walter Energy shareholders have had one of the wildest roller-coaster rides in the market.

Since hitting its lows of under $10 per share this summer, Walter has rebounded by about 50%. There are continuing risks associated with the company, such as the oversupply problems in the coal market (similar to steel), which have led to weak prices. There have been reports about lowered production, especially from overseas companies, but we're yet to see the problems really start to correct themselves. Until production cuts start producing a real price recovery, there is still uncertainty involved with Walter.

Final thoughts
After gains like these, there is nothing wrong with taking some money off the table, regardless of how much upside potential you may think the stock still has. While all three of these companies should continue to rebound, there is always a question of how long a recovery will take. The market is handing you a payday's only responsible to at least consider taking it.

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Matthew Frankel owns shares of Walter Industries and United States Steel.. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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