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Gordon Johnson Bearish On Caterpillar, 'Aggressively' Short U.S. Steel

Gordon Johnson Bearish On Caterpillar, 'Aggressively' Short U.S. Steel
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China is scrambling to prop up its credit driven economy, which released very weak Q1 results according to Axiom's Gordon Johnson. Effects of the slowdown in China will be felt worldwide, specifically by United States Steel Corporation (NYSE: X). He set a price target of $5 on U.S. Steel.

Short U.S. Steel

U.S. Steel rallied in late February from a low of $7.73 to a peak of $20.30 in early May. The company was trading at $14.36 on Friday. The stock's pop was due to ,in Johnson's view:

  • "$1 trillion U.S. dollars in new credit created in China. Credit is the life-blood of China's economy."
  • "There was an explosion of speculative trading in the commodity futures market on the Chinese stock exchanges."

Both of these points led to an enormous increase in commodity prices, which led to a massive rally in commodity stocks and steel stocks. Johnson said, "We never thought [the rally] was real" as China released total social financing, the credit number was almost half of what analysts were estimating. There was a 30 percent year-over-year decline in the credit number. China is "tightening not loosening" Johnson noted.

In addition, China's economy is slowing industrially. The country has roughly 50 percent of the world's consumption of steel and as it slows, U.S. Steel is in trouble. "We will be shorting that stock aggressively," Johnson said.


The analyst went on to give his thesis about Caterpillar Inc. (NYSE: CAT). The company is exposed to mining, fracking and equipment purchases globally. All of these categories are in structural decline. There is excess supply throughout the three sectors Caterpillar is mainly exposed to and "it could be grounds for a repeat of the 'supply shock' that occurred in 1999 to 2001/02" in Caterpillar, Johnson noted.

"A Joy Global Inc. (NYSE: JOY)-like moment is coming for Caterpillar and it will happen this year," Johnson stated. He set a price target of $33 for the year, which is over 50 percent down from where Caterpillar was trading on Friday ($70.94).

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