Nerves of Steel Needed to Trade Steel Stocks

Oversupply fears appear factored into steel stocks

Despite President Donald Trump imposing steel tariffs in March 2018 to protect the U.S. steel industry, the nation's cohort of steel stocks remains entrenched deep in a bear market.

The tariffs caused customers to stockpile steel in fear of supply shortages that led to an initial price spike in the metal's price. Consequently, production has increased to a level where it far outpaces the decline in steel imports – imports fell by 500,000 tons in the first quarter. The steel glut has pushed hot rolled coiled steel prices down 21% year to date (YTD) and continues to put downward pressure on stocks within the sector.

"We observe that supply exceeded demand ... over the past six months," UBS Group analyst Andreas Bokkenheuser told clients in a research note, according to CNN Business

Amid ongoing oversupply concerns, major U.S. steel companies reported solid first quarter earnings, trade at a significant discount to the S&P 500, and sit near major technical support. Those who think the rust may soon lift of this unloved industry should run their eye over these three large-cap steel players for trading opportunities.

United States Steel Corporation (X)

Founded 118 years ago, United States Steel Corporation (X) produces and sells flat-rolled and tubular steel products primarily in North America and Europe. It operates through three business segments: North American Flat-Rolled, U.S. Steel Europe, and Tubular Products. The Pittsburgh, Pennsylvania-based steel company reported earnings per share (EPS) of 31 cents in the first quarter, up from 10 cents in the year-ago quarter. Top-line year-over-year (YoY) growth came in at 11%. U.S. Steel stock trades at a low earnings multiple of 2.1, well below the industry average multiple of 5.7. Trading at $13.58 with a market capitalization of $2.34 billion and offering a 1.69% dividend yield, the stock is down 25% on the year as of June 10, 2019.

The bears have had total control of the U.S. Steel share price over the past 12 months apart from a two-month relief rally in January and February. In early June, the stock has found support at the lower trendline of a descending channel that may trigger further buying in the weeks ahead – especially given that roughly 15% of the float is held short. Those who take a long position should look for a move to the channel pattern's upper trendline at the $19 level. Manage risk by setting a stop-loss order under last month's swing low at $11.67 and moving it to the breakeven point if the price rises above the 50-day simple moving average (SMA).

Chart depicting the share price of United States Steel Corporation (X)

Nucor Corporation (NUE)

Nucor Corporation (NUE) manufactures and markets steel products in the United States as well as globally. The $15.50 billion steel company covers every phase of the steelmaking process, from collecting and processing scrap to manufacturing value-added fabricated steel products. Despite a string of broker downgrades, Nucor beat analysts' first quarter earnings expectations, posting EPS of $1.55 versus estimates of $1.50. Revenue also topped expectations, coming in at $6,096.6 million compared to projections of $6,034.1 million. As of June 10, 2019, Nucor stock pays an attractive 3.33% dividend yield and has fallen 1.10% YTD. Although the share price is trading down for the year, it is outperforming the steel industry average by 5.58% over the same period.

Nucor shares have oscillated within a broad descending channel since late July 2018. The pattern's 10-point range offers swing traders plenty of profit potential. A recent bounce from the channel's lower trendline opens the door for a run to major resistance at $59. Traders who buy at the current level should consider placing a stop beneath the May 31 low at $47.13. Assuming a fill at Friday's $50.84 closing price, the trade offers a risk/reward ratio of 1:2.57 ($3.17:$8.16).

Chart depicting the share price of Nucor Corporation (NUE)

Steel Dynamics, Inc. (STLD)

With a market cap of $5.76 billion, Steel Dynamics, Inc. (STLD) engages in the steel products manufacturing and metals recycling businesses in the United States and internationally. The steel giant's products primarily serve the construction, automotive, and machinery end markets, while its steel fabrication business targets the nonresidential construction industry. Steel Dynamics posted mixed first quarter results, missing earnings estimates but topping revenue forecasts. The company said that consistent improvement and stabilization in flat roll steel prices had a favorable impact in higher flat roll order activity and strong order backlogs during the quarter. Analysts have an average 12-month price target on the stock at $40.58 – a 56.5% premium to Friday's $25.93 closing price. Steel Dynamics shares have provided a YTD return of -12.88% as of June 10, 2019. The stock's 3.82% dividend yield helps partially offset its price depreciation.

Like the two steel stocks discussed above, a descending channel has formed on the Steel Dynamics chart. May's sharp sell-off has pushed the price toward the channel's lower trendline, which now acts as a crucial support level. Also, the relative strength index (RSI) gives a reading below 30 – indicating short-term oversold conditions that could lead to technical buying at this area. Those who decide to trade the stock should think about booking profits near $34, where the price encounters resistance from the channel's top trendline. Close open trades if the stock fails to hold the late May low at $25.02.

Chart depicting the share price of Steel Dynamics, Inc. (STLD)
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