Politicians are at the forefront of new regulation approval, policy changes and have a general feel for the headwinds facing certain industries. Therefore, they are deemed to be people of influence. As a result, it is a legal requirement for politicians to disclose when they buy and sell stocks.
While politicians often have different motivations for investing in stocks than professional money managers, this information can be useful to to see which stocks these figures of influence are bullish or bearish on.
In this discussion, I will dive into two stocks politicians have been selling over the past three months.
The information regarding politician buys and sells comes from regulatory filings with the Securities and Exchange Commission. According to the STOCK Act, which was passed in 2012, members of Congress are required by law to file any stock trades with the SEC within 45 days. It is to prohibit members of Congress and employees of Congress from using private information derived from their official positions for personal benefit, and for other purposes. The bill also applies to all employees in the Executive and Judicial branches of the federal government.
United States Steel
Approximately nine sell transactions have been initiated by politicians within the past three months for United States Steel Corp. (X, Financial). The primary individual who has been selling the stock is Tommy Tuberville, a Republican senator for Alabama.
This is an interesting set of trades as it could indicate fears of a recession and lower infrastructure spending as a whole.
The company, which is also called U.S. Steel, is one of the largest steel manufacturers in the U.S. It extracts raw materials such as iron ore, which is then processed in furnaces before being refined into steel products. Its output applications include the automotive industry, construction, infrastructure and even energy.
Many automotive manufacturers have recently highlighted lower vehicle demand, which could impact the sales of a company such as U.S. Steel.
On a more positive note, the business is vertically integrated to an extent. This gives the company greater control over its supply chain.
Unlike semiconductor chips, which rapidly change from year to year, steel is a consistent commodity. Therefore, even if the economy slows down and demand falls, the steel can just be kept in storage with no issue.
Cyclical financials
U.S. Steel reported mixed financial results for the first quarter of 2023. Its revenue of $4.47 billion beat analyst forecasts by $224 million despite declining by 14.6% year over year. The decline was mainly driven by cyclical factors like demand.
Despite these macro challenges, management praised the “ultra-thin” steel which is required for the electric vehicle industry during the first-quarter earnings call. Its Big River Steel plant is expected to produce around 200,000 tons per year of this steel. The company is even rolling out an Electrical Steel Index to build deeper relationships with EV manufacturers.
Moving on, U.S. Steel reported $199 million in net income and a 5% operating margin for the quarter. This was substantially lower than the 22% reported in the prior year, but is expected as demand for steel has fallen in the short term.
For the three-month period, the company generated $181 million in operating cash flow and $25 million in free cash flow. Its capital expenditure was a substantial $582 million. However, the company is improving its capital efficiency. For example, its latest Mini Mill segment requires just $15 per ton of sustaining capital expenditures. This is substantially better than the $30 per ton required for its previous generations of equipment.
U.S steel has also made it a strategic priority to lower its emissions following political pressure. Progress has been great so far as its electric arc furnaces now produce up to 80% lower greenhouse gases than its traditional blast furnaces.
The company has a robust balance sheet to weather any economic storm with $2.8 billion in cash and cash equivalents. It also has an adjusted gross debt-to-Ebitda ratio of 1.30 for the trailing 12 months, which is better than management's expectation of between 3 and 3.50.
U.S. Steel also pays a forward dividend yield of 0.84% and bought back $75 million worth of stock in the first quarter.
Valuation
The stock trades with a price-sales ratio of 0.37, which is 17% cheaper than its five-year average.
The GF Value Line also indicates a fair value of around $25 per share. Thus, the stock is fairly valued currently based on its historical ratios, past financial performance and analysts' future earnings projections.
Cisco Systems
Three sell transactions have been initiated by a handful of politicians within the past three months for Cisco Systems Inc. (CSCO, Financial).
Cisco is a legacy networking equipment designer and manufacturer. The company is known for its switches, routers and Wi-Fi hotspots, among other products.
More recently, the tech company has made a major push into hybrid working. Its products in this space include a Cisco IP phone, web camera, desk, room navigator panels and more. These compete directly with Microsoft's (MSFT, Financial) Teams Rooms, which has developed a similar suite of products.
Its second major area of focus is hybrid cloud, which involves a combination of traditional on-premises infrastructure with the power of the data center. According to a study by IBM, 77% of IT leaders have adopted or will adopt a hybrid cloud model. Therefore, Cisco could be poised to benefit from this trend with its suite of software-defined wide area network (SD-WAN) products.
Cisco has also created a variety of solutions in the rapidly growing artificial intelligence industry, including an AI-powered network analysis tool that enables IT teams to rapidly discover any potential network issues without the manual and time-consuming process normally required.
Strong financials
Cisco reported mixed financial results for its third quarter of fiscal 2023. Revenue of $14.57 billion beat analyst forecasts by $212 million and rose by a solid 13.53% year over year. This was driven by 17% year-over-year growth in its product revenue to $11.1 billion, with particular strength in its Secure Agile Networks.
Enterprise Routing also continued to grow with strength in its Catalyst 8000 series routers. End to End Security sales only rose by 2% year over year, but has huge growth potential on the increasing need for cybersecurity protection.
Its total software revenue was $4.3 billion, which rose by 18% year over year.
Cisco reported 11% growth in operating income and non-GAAP earnings per share of $1, which beat expectations by 3 cents.
Cisco has a fortress-like balance sheet with a staggering $23 billion in cash and short-term investments in addition to total debt of $9 billion, which is well covered.
Valuation
Cisco trades with a price-earnings ratio of 18, which is cheaper than its five-year average.
The stock also has a price-sales ratio of 3.8, which is about 8.3% below its average for the same period.
Final thoughts
While politicians have been selling shares of both U.S Steel and Cisco, I personally believe this is unjustified.
U.S. Steel will face-short term headwinds from the cyclical decline in demand, driven by the macroeconomic environment. But over the long term, as countries such as the U.S. are aiming to bolster their local supply chains, the business will likely benefit.
Cisco, on the other hand, is an overlooked player in the future of networking as it is releasing products in growing industries such as the hybrid cloud.
In all, they may have good investment potential.
