Another Swing at a New Emerging Steel Giant in Russia

This week’s Global Bull Market Alert pick increases your exposure to the stock market with a pick that I recommended back in the fall. Sadly, you were stopped out of it in the global market turmoil. Even more frustratingly, the stock has almost doubled since then, even as the global markets have had their worst start to a year in recent memory. Nevertheless, as with Potash (POT) last week, I’m betting that this stock has further to run — even if global stock markets continue to struggle.

Mechel Open Joint Stock Company (MTL) is one of Russia’s largest mining and metals companies, producing steel, as well as processed coal and metal products used in mining industries. Besides being the largest producer of hard-coking coal in Russia, with more than a 50% market share in 2007, Mechel is Russia’s largest producer of stainless steel, the primary end use for chrome products. The company also produces nickel. Mechel’s ascent from relative obscurity has been rapid. Rising metals prices and industry consolidation have more than quadrupled Mechel’s sales from a mere $1 billion in 2001 to $5.9 billion in 2007.

Mechel has been able to achieve such remarkable growth thanks to a methodical and relentless acquisition spree. Just last week, Mechel acquired Romania’s wire rod producer Ductil Steel for 142 million Euros ($221 million). Within the last 12 months, it successfully bid $2.33 billion to win an auction for coal assets in Yakutia, Russia; it has bought the Bratsk Ferro-Alloy Plant, also in Russia; and last month, it also agreed to acquire ferro-chrome producer Oriel Resources, a London-based owner of chrome and nickel mines in Kazakhstan, for $1.5 billion.

Mechel has focused on developing into one of the most vertically integrated steel companies on the planet. Thanks to its savvy acquisitions, Mechel’s steel business is 100% self-sufficient in coking coal, 80% in iron ore and 50% in electricity. That means that while other companies suffer from rises in the cost of commodities, Mechel is able to thrive.

A combination of a favorable market environment, organic growth, and selective acquisitions means that Mechel is growing by leaps and bounds. Nor is it about to stop. The company has earmarked $2.7 billion by 2011 to increase steel production by 26% and improve its coal, iron ore and nickel mining operations. In December, the company said net income for the first nine months of the year almost doubled, driven by higher revenue and lower costs. And you can get all this growth for a forward P/E of only 12.8.

How much upside does this stock have? The median target price for the stock among nine brokers is $160. There is one broker that pegs Mechel’s value at $570.

So buy Mechel (MTL) at market today, and place your stop at $90. For potentially even bigger upside, buy the July $150 call options (MTLGY.X). Here’s a word of warning. The stock has had a strong run recently, and may be due for a technical correction. But I have again placed a wide stop on this stock, as I want to avoid your getting stopped out of this potentially big winner.

PORTFOLIO UPDATE

All of your current Global Bull Market Alert positions are broadly flat — with the commodities positions in the iPath DJ AIG Agriculture TR Sub-Idx ETN (JJA) and the iShares Silver Trust (SLV) having recovered somewhat after the sharp sell off of a few weeks ago. Only your gold play, Yamana Gold Inc. (AUY), remains significantly off its entry price, as the price of gold has yet to recover toward its $1,000+ levels. Nevertheless, all of these positions remain in secular bull markets, and will make you money as they resume their long-term upward trend.

The CurrencyShares Japanese Yen Trust (FXY) has been your strongest position, acting as a hedge against the downdraft in global markets. Your short position in the CurrencyShares British Pound Sterling Trust (FXB) also is flat. The British Pound is plummeting, hitting record lows against the Euro on a daily basis. Sadly, so is the U.S. dollar, which is making it tough to make money on this position.

Your stock positions, Canada’s Potash (POT) and Russia’s Mechel (MTL), both are fundamentally and technically outstanding stocks — “the best of the best” that I’ve been able to uncover in global markets. They have been, and I fully expect them to continue to be, among the strongest performers in the months ahead. I’ve intentionally put wide stops on both of these picks. The biggest “mistake” I’ve made on previous occasions in recommending these stocks is not the stock picks themselves. It’s having been stopped out of them in the first place. But as Van Tharp, a leading trading coach notes, the only real “mistake” in trading is not sticking to your system.

Finally, those of you who are experienced traders may have heard of trading legend Ed Seykota, who was profiled in Jack Schwager’s classic Market Wizards. Here is a video of Seykota and his band with “The Whipsaw Song,” which summarizes the essentials (and frustrations) of successful trading. Like most genuine wisdom, the secret is simple, but not easy.

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