U.S. Steel: A Contrarian's Play Amid Regulatory Crosscurrents

The $14.9 billion bid by Nippon Steel for U.S. Steel has become a lightning rod for regulatory uncertainty, political theatrics, and market skepticism. As the June 5 expiration of the 8-day litigation pause extension looms, the stock (NYSE: USST) trades at a 23.6% discount to Nippon's $55-per-share offer—pricing in worst-case scenarios like deal collapse or prolonged delays. For contrarian investors, this creates a compelling risk/reward asymmetry: limited downside near $42/share versus an upside of $55/share (plus potential premium inflation) as regulatory clarity emerges. Here's why now is the time to position for this asymmetry.

The Regulatory Clock Ticks: Why June 5 is a Pivot Point

The 8-day litigation pause extension, originally granted to buy time for political and legal maneuvering, expires today. While the June 18 CFIUS deadline remains, this date is critical for signaling the administration's intent. Recent developments suggest momentum is shifting toward deal approval:- Trump's Mixed Signals, but Strategic Compromises: While President Trump publicly stated he “doesn't want U.S. Steel to go to Japan,” his team has privately signaled openness to revised terms. A “golden share” granting the U.S. government veto power over strategic decisions—already part of the deal—may satisfy national security concerns. - CFIUS's Practical Deadline: The committee's May 21 recommendation to Trump likely contained actionable mitigation measures. With shareholders having overwhelmingly approved the deal (98% in favor), and international approvals secured, bureaucratic inertia may push for resolution before June 18.

Market Pessimism Exaggerates Risk

The 23.6% discount to the offer reflects two key fears: 1. Political Volatility: Trump's inconsistent stance has created whiplash. His recent 13% post-announcement dip (after calling the deal “not final”) amplified short interest to 18% of float—a record high. 2. CFIUS Delays: Concerns over Japan-China ties (Nippon Steel's minimal 5% Chinese operations) have fueled skepticism. Yet, the deal's revised terms—$14B in U.S. investments by 2028, Pittsburgh headquarters retention, and a U.S.-controlled board—directly address these issues.

This pessimism ignores three critical facts:- Structural Deal Strength: Shareholder approval, antitrust clearance, and international green lights mean the only remaining hurdle is CFIUS. - Downside Floor at $42: USST's $42.50 price reflects a 23% discount to $55. Even if delays push the deal to late 2025, premium erosion is unlikely given Nippon's strategic need to secure U.S. capacity against Chinese competition.- CDS and Options Skew Signal Undervaluation: Credit default swaps on USST have widened to 500 bps (vs. 300 bps in mid-2024), pricing in default risk that's unwarranted. Options markets show a put/call ratio of 1.8, suggesting over-hedging by bears.

The Contrarian Play: Buy the Discount, Hedge the Volatility

Immediate action: Accumulate USST at current levels, targeting a 5–10% position in a portfolio. The risk/reward is skewed toward reward:- Upside Case (60% probability): CFIUS approves by June 18. USST rallies to $55, yielding a 29% return. If premiums inflate (as seen in past cross-border deals), $60+ is plausible.- Base Case (30% probability): Approval delayed until mid-2025. USST consolidates near $48–$50 as CFIUS reviews final terms. - Downside (10% probability): Deal collapses. USST drops to $40–$42 (a 7–10% loss). This scenario requires CFIUS rejecting all terms, which is unlikely given the geopolitical risks of destabilizing U.S. steel capacity.

Hedging Strategy: Use put options (e.g., June $45 puts) to protect against downside while maintaining exposure to upside. The cost (approx. $2–$3 per share) leaves a net floor at $42–$43.

Why Now? Technicals Confirm an Inflection Point

• Short Squeeze Potential: With 18% of shares sold short, any positive CFIUS news could trigger a rapid unwind.
• Sentiment Overdue for a Turn: Negative headlines have dominated since January's CFIUS block, but the stock has held above $42 since May—a sign of buyer support at these levels.
• Mean Reversion in Options Markets: The current put/call skew suggests a mispricing; a normalization would lift the stock.

Conclusion: The Discount is a Mirage

The regulatory and political crosscurrents swirling around USST have created a once-in-a-decade contrarian opportunity. With a 23.6% discount to a done deal's terms, a $42 floor, and a 60% probability of $55+ upside, the math is irrefutable. Even if skeptics demand proof of CFIUS approval, the path to resolution is narrower than the market believes. Investors who buy USST now will capture both the premium and the inevitable short-covering rally when the deal finally crosses the finish line.

Recommendation: Buy USST at current levels, targeting $55. For conservative investors, use 10% of capital with a $42 stop-loss. The risk/reward favors aggressive accumulation now, before the market catches up to the reality that this deal isn't going anywhere.