Sliding Steel Stocks

These days, it's not hard to find sectors and industries that are being adversely impacted by the confluence of negative macroeconomic factors at play in the market. Whether its tepid growth in the U.S. and the corresponding mediocre data points, slowing growth and bad data points in China or increasingly heightened concerns that the Euro Zone will not survive, scores so-called high beta sectors and sub-sectors have been walloped since early April. Steel stocks, a highly cyclical sub-sector of the high beta materials universe, have been no exception. If anything, steel stocks have been worse than the materials group at large. Just look at the performance of the Market Vectors Steel ETF (NYSE: SLX) relative to the Material Select SPDR (NYSE: XLB). XLB, which is home to a few steel stocks, is down about 5.3% in the past month.

Indicating that steel stocks as a group have been far worse then the broader materials sector, SLX is off 15.3% over the same time. Obviously when investors sell an ETF, the fund's assets under management total falls and that's exactly what has happened with SLX. When we initially examined the fund in mid-February, it had about $190 million in AUM. As of May 24, that number had dwindled to $111.9 million.

In SLX's defense, it should be noted it has outperformed its nearest rival, the unheralded PowerShares Dynamic Steel Portfolio (NASDAQ: PSTL), which has slid 18.5% in the past month. But there might be good news on the horizon as some analysts believe the steel industry is better managed today than it has been at anytime in its past and that it major steelmakers, such as those firms that dot SLX's lineup, are better able to manage pricing and supply/demand trends.

While acknowledging the health of the European economy and the magnitude of a slowdown in China are legitimate concerns, Morningstar had this to say about the steel sector: "...we view them as shorter-term concerns and do not believe that fundamentals will deteriorate to the severe degree implied by steel firms' market prices. Even as global demand appears to be weakening, likely creating some oversupply in our view, this has been to some extent offset by positive impacts on the raw-materials front, with lower iron ore and coal costs. So, industry players' margins should hold up."

That may not be an engraved invitation to establish large positions in the likes of Nucor (NYSE: NUE) and U.S. Steel (NYSE: X), but it arguably implies that despite the recent carnage, the steel sector is home to strong long-term fundamentals. In other words, it may take patience of steel before investors are reward by SLX and its components, but the rewards will eventually arrive.