Editor’s note: This article was first published in December 2015, as a market call from that month: the share prices and support levels, the 2016 outlook, ArcelorMittal’s possible exit from the IBEX 35 and the five-year forecast. Per-share prices may not be comparable with later quotes because of share consolidation.
I would never have bought ArcelorMittal above 13 euros a share, and not because I’m superstitious or because it was expensive. Many analysts were recommending buying the stock at those prices because of its discount and its potential to rise in value.
I included ArcelorMittal in my list of 5 favourite stocks to buy for the long term (with a DCA strategy), since it was trading at a discount. With ArcelorMittal we are witnessing the stupidity of the markets and the farce of brokerage recommendations, the most embarrassing case being Citigroup, which recommended buying ArcelorMittal in October and by the end of November advised against it, even though the company’s situation was just as “bad or good” in October as in November. Admittedly, the chart has got a lot worse.
In stock market investing, as in business, you make more money when you buy than when you sell. In other words, buying at a good price is the difference between getting an excellent return and a dreadful one.
Perhaps I jumped the gun in buying ArcelorMittal, where my average cost is about €4.49 a share. I thought it had held the support around €4.40 and was going to form a double bottom. I was clearly wrong, and after losing that support and falling below €4, its share price could now go into free fall, with the danger zones at €3.90 and €3.70.
ArcelorMittal is the bears’ favourite target right now, and what we saw at the end of last week was a full-scale sweep of stop-losses. Still, I’d like to remind you that we’re not talking about a penny stock, but about a leading company in the steel sector that is about to go through some problems.
See also: Investments and bonds
The company itself has already warned that there is little prospect of improvement in 2016, owing to several factors such as falling demand, China and the drop in steel prices.
On the other hand, Arcelor has clean accounts and contained debt; in other words, given the storm it’s facing, Arcelor isn’t doing badly.
At its current price, Arcelor has already priced in the worst scenarios for 2016, although what we can’t know is whether the company will run into more trouble.
In any case, in terms of the risk-reward equation, the fall in price makes the risk worth taking. That said, as long as it keeps falling, we’ll follow Buffett’s principle of “not trying to catch a falling knife”.
I’ve seen many investors say they’re well aware that this company will go the way of Gamesa, which was driven down to one euro and then staged a surprising rebound to €16.
But I wouldn’t risk waiting for it to reach one euro, because it very probably won’t. All we can do is average down at key levels, in case one of those rebounds turns out to be the start of the stock’s recovery.
What would analysts be telling us right now if Arcelor were trading at €7.20?
It’s curious that, with the company’s business conditions and future prospects exactly the same, if Arcelor were trading above €7.20 or even above €14, right now they’d be telling us “buy”, but below €4 they tell us “sell and wait for it to break through resistance levels”.
What will happen to ArcelorMittal in the short term?
Most likely Arcelor will keep falling, and we’ll probably see failed rebound attempts with high intraday volatility (as this stock has accustomed us to), which is where speculators can make money at the expense of small investors.
As a candidate to drop out of the IBEX 35, it will most likely fall some more, because some funds don’t want to, or can’t, hold shares in a company that isn’t in the IBEX.
That said, if we look at the history of stocks, those that enter the IBEX tend to fall, and those that leave it tend to rise on the Mercado Continuo (the Spanish continuous market where the rest of the listed companies trade). The reason is simply that the news itself has already been priced in.
In other words, when it becomes known that a Mercado Continuo company will join the IBEX, its shares usually rise on the news; once it’s in, investors take profits and the company tends to perform worse in terms of returns than the company that was dropped from the IBEX, which fell on the news that it was leaving and, once out, investors took the opportunity to buy it at an attractive price.
I’m not saying Arcelor will rise once it’s out of the IBEX, but it’s a possibility.
So nobody knows what Arcelor will do in the short term. Most likely it will fall.
What will Arcelor do in the long term?
Although nobody knows exactly what this company will do in the long term, it will most likely rise (and by a lot from current prices) within five years.
We may see cuts and layoffs at the company, and even other negative news about it, but in the long term the logical and normal thing is for this company to recover a large part of its share price.
So, bearing in mind that in the stock market the most profitable investment is long-term, and even more profitable is buying cheap, since we don’t know whether the stock will bounce at €3.50 or at €2, let each of you work out your own averaging strategy if you’re interested in holding this company in your portfolio.
Remember, though, that all stock market investment carries risk, so you should act in line with the level of risk you’re willing to take.
In my own case… I have the feeling I’ve seen this film several times before, and the fact that all the brokerages have agreed right now to advise against Arcelor only whets my appetite for this company.
Featured image: Borvan53, CC BY-SA 4.0, via Wikimedia Commons.
