Universal Stainless & Alloy Products (NASDAQ: USAP) Set to Grow in Undersupplied Premium Markets

Universal Stainless & Alloy Products (NASDAQ: USAP) Set to Grow in Undersupplied Premium Markets

The market has had a fantastic run so far this year, posting over 6 percent in gains for both the S&P and Dow Jones. Folks have been optimistic since the beginning of the year when politicians averted economic disaster by coming to a temporary agreement on the fiscal cliff. Since then, everyone has been jumping into equities, with some noticeable rotation from fixed income to equities. A negative GDP print (mostly due to defense cuts) could not slow the markets, as most investors believe that this year companies are going to outperform. Money managers have been playing catch up this January, chasing performance by buying at every dip. With markets at multi-year highs and everyone seemingly optimistic in 2013, prices have become a bit top-heavy. The majority of analysts are calling for a pullback, which usually means that there will be a slight consolidation period as it seems that most investors are waiting for more attractive prices.

The majority sentiment is that not too many want to put more money to work at these levels and are waiting for cheaper prices. Investors may get their wish sooner than they think due to the political gridlock in Washington. The threat of sequestration cuts, set to begin on 1 March, have been a looming headwind in the financial markets. Most are hoping our elected officials can resolve the situation and not wait until the last minute. But the overwhelming feeling is skepticism, as both sides have dug in their heels and have taken firm positions. Harsh cuts in government spending may be good in the long-term considering the country’s financial position, but it will have a negative effect on the financial markets.

With uncertain times ahead, investing in industries that are set to rebound sometimes offer the greatest protection. Universal Stainless & Alloy Products (NASDAQ: USAP) manufactures and markets semi-finished and finished specialty steel products, including stainless steel, tool steel, and certain other alloyed steels. The company’s products are sold to re-rollers, forgers, service centers, and original equipment manufacturers. Universal also provides conversion services on materials supplied by customers.

The company did endure a difficult 2012 that concluded with a 24 percent fall in sales and a 74 percent drop in net income in the fourth quarter. But the industry tends to be very cyclical, with the company’s CEO stating that “most folks are telling us they need until March 2013 to get comfortable. We’ll start to see some improvement, and then we’ll have one of those weird years where the second half of the year is better than the first half.”

This past January, the Institute for Supply Management (ISM) Steel Survey showed improved optimism and a more favorable environment. Buyers’ outlook for a better economy jumped this past month, with an economic decline in the next six months falling to a nine-month low of just 9 percent. There was a 36 percent increase in the number of respondents that are expecting an increase in sales and production for their own industries, with only 9 percent expecting a decrease.

“Universal Stainless & Alloy Products Inc. has positioned itself to grow in undersupplied premium markets and will avoid the likely pricing catfights caused by capacity additions in the flat-rolled market,” President and Chief Executive Officer Dennis Oates said.

The stock is trading just above $36 per share. With the company’s expansion plans and position in a rebounding steel industry, adding USAP may be a good addition to your portfolio.