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Are Steel Stocks A Steal?
Cyclical steel stocks have been left for dead in this market. With talk turning to the likelihood of the economic recovery slowing, are these stocks worth buying? Let's take a look.
In the Market's Basement
United States Steel (NYSE:X) is currently trading at $37.66 a share, way off from its 52-week high of $70.95, with its low having touched $29.35. Nucor (NYSE:NUE) is trading infinitesimally above its 52-week low of $37.31. Steel stocks, cyclical even during less volatile economic times, are vividly expressing this deep cyclicality. While business has picked up for the steel makers, there is concern over the second half of the year turning more sluggish. A double-dip recession with a global flavor might find these stocks showing their deep cyclicality with a vengeance. That's the pessimistic view. (To learn more about this type of stock, see Cyclical Versus Non-Cyclical Stocks.)
IN PICTURES: 8 Ways To Survive A Market Downturn
Steel's Tensile Rebound
United States Steel made huge progress in its first quarter, even though it registered a loss of $1.10 a share. This compared with a loss of $3.78 a year earlier. Revenue was also up 42%. The stock trades at a projected P/E of 6.8, price-to-book of 1.2, and price-to-sales of 0.5. Those are numbers that indicate a discount for the stock.
Nucor's forward P/E is 10.22, indicating a healthier near-term earnings picture. International juggernaut Arcelor Mittal (NYSE:MT), with its $41 billion market cap, is trading just off its 52-week low, with a current P/E of 22.57 and a forward P/E of 6.44. Arcelor Mittal has earnings per share of $1.11 right now. A probable upsurge in the steel business should propel its earnings that much more.
Steel's Prospects With Cautions
United States Steel's chief executive, John Surma, said the worst of the steel industry downturn has ended, but rising raw material costs may dampen profitability.The costs of iron ore and metallurgical coal are both rising and volatile, and can't easily be passed on by steel producers. Integrated steel producers such as United States Steel should weather these costs better. Both this company and Arcelor Mittal, thanks to their vertical integration, were cited as being in a better position than, say, AK Steel Holdings (NYSE:AKS).
Too Much Gloom?
Although value investing is sometimes regarded as being about as hip as wearing your grandma's shoes, we're looking at the steel stocks from a value perspective. With China demand slowing, Europe swooning, the U.S. stagnating and prospects for the second half of 2010 not looking as good as once thought, other investors might want to flee. However, the gloom and doom may be overdone. Schnitzer Steel (Nasdaq:SCHN) had blowout earnings, but the stock was still talked down in a June 29 article on Fool.com. Even with the global economy struggling, the steel picture has improved and should continue to do so. And not all analysts think it's a lost cause: Barron's had a recent bullish piece on the industry, suggesting steel stocks may eventually play out with new highs.
Stocks a Steal?
Unless you are a deep believer in an ever-worsening, permanent recession, and we know what that is - a worldwide depression - the global economy will eventually come back. And steel stocks look poised to do well this year. Arcelor Mittal stock is near its year low and Nucor make for attractive values. United States Steel, an economic bellwether, is in there too. It may take some time for these investments to pay off. At this point, investors may be getting in a bit early, but steel stocks are at least a bargain and may even be a steal.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
In the Market's Basement
United States Steel (NYSE:X) is currently trading at $37.66 a share, way off from its 52-week high of $70.95, with its low having touched $29.35. Nucor (NYSE:NUE) is trading infinitesimally above its 52-week low of $37.31. Steel stocks, cyclical even during less volatile economic times, are vividly expressing this deep cyclicality. While business has picked up for the steel makers, there is concern over the second half of the year turning more sluggish. A double-dip recession with a global flavor might find these stocks showing their deep cyclicality with a vengeance. That's the pessimistic view. (To learn more about this type of stock, see Cyclical Versus Non-Cyclical Stocks.)
IN PICTURES: 8 Ways To Survive A Market Downturn
Steel's Tensile Rebound
United States Steel made huge progress in its first quarter, even though it registered a loss of $1.10 a share. This compared with a loss of $3.78 a year earlier. Revenue was also up 42%. The stock trades at a projected P/E of 6.8, price-to-book of 1.2, and price-to-sales of 0.5. Those are numbers that indicate a discount for the stock.
Steel's Prospects With Cautions
United States Steel's chief executive, John Surma, said the worst of the steel industry downturn has ended, but rising raw material costs may dampen profitability.The costs of iron ore and metallurgical coal are both rising and volatile, and can't easily be passed on by steel producers. Integrated steel producers such as United States Steel should weather these costs better. Both this company and Arcelor Mittal, thanks to their vertical integration, were cited as being in a better position than, say, AK Steel Holdings (NYSE:AKS).
Too Much Gloom?
Although value investing is sometimes regarded as being about as hip as wearing your grandma's shoes, we're looking at the steel stocks from a value perspective. With China demand slowing, Europe swooning, the U.S. stagnating and prospects for the second half of 2010 not looking as good as once thought, other investors might want to flee. However, the gloom and doom may be overdone. Schnitzer Steel (Nasdaq:SCHN) had blowout earnings, but the stock was still talked down in a June 29 article on Fool.com. Even with the global economy struggling, the steel picture has improved and should continue to do so. And not all analysts think it's a lost cause: Barron's had a recent bullish piece on the industry, suggesting steel stocks may eventually play out with new highs.
Stocks a Steal?
Unless you are a deep believer in an ever-worsening, permanent recession, and we know what that is - a worldwide depression - the global economy will eventually come back. And steel stocks look poised to do well this year. Arcelor Mittal stock is near its year low and Nucor make for attractive values. United States Steel, an economic bellwether, is in there too. It may take some time for these investments to pay off. At this point, investors may be getting in a bit early, but steel stocks are at least a bargain and may even be a steal.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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