Steel stocks have certainly tested investors' mettle in 2020, with the cyclical industry trading down about 30% on the year compared to a 6% fall in the S&P 500 amid an expected sharp pandemic-induced global recession. However, the steel group has outpaced the broader market by around 20% over the past three months as hopes grow that government infrastructure stimulus spending will underpin steel demand.
In March, President Donald Trump called for a $2 trillion infrastructure package to help revive the economy. Although Congress hasn't agreed upon such a support measure, the president and House Speaker Nancy Pelosi have both recently expressed interest in increasing infrastructure investment. Furthermore, China is on track to increase its fiscal deficit target to more than 3% this year to stimulate infrastructure spending.
Below, we take a more detailed look at three bellwether steel stocks that sit well posited to capitalize on increased infrastructure spending before turning to the charts to identify important trading levels using technical analysis.
United States Steel Corporation (X)
With a market capitalization of $1.57 billion, United States Steel Corporation (X) produces and markets steel products in North America and Europe. Earlier this month, GLJ Research upgraded the stock based on expectations of government infrastructure spending, a continuation of quantitative easing (QE) infinity from the Federal Reserve, and a rebound in U.S. auto production. On the liquidity front, the Pittsburgh-based firm ended the first quarter with cash and cash equivalents of $1.35 billion – up 144% year over year, placing it in a position to maintain strategic flexibility as the global economy recovers. As of June 15, 2020, United States Steel stock offers a 1.2% dividend yield and has added 18.64% over the past month.
The steelmaker's share price broke above an ascending triangle and the 200-day simple moving average (SMA) in early June before retracing back to the breakout point last week. Swing traders who buy the pullback to this crucial support area should look for a move up to around $14.25, where the stock may encounter selling pressure near the prominent December 2019 swing high. Exit the trade with a small loss if the price fails to hold above the June 11 low at $8.31.
Nucor Corporation (NUE)
Steel products maker Nucor Corporation (NUE) said during its first quarter earnings call that it expects market conditions to bottom out in the second quarter and sees a return to profitability in the back half of the year. Although the firm's cash position declined 20% from the year-ago quarter, it still reported reserves of $1.25 billion – a healthy amount to ride out near-term uncertainty. Nucor stock has returned 5.61% over the past month and 31% over the past three months as of June 15, 2020. Investors also receive a healthy 4.06% dividend yield.
Since plumbing its March lows, the stock trended steadily higher before finding a wall of resistance at the 200-day SMA earlier this month. The current dip provides a buying opportunity at the $40 level, where price encounters a confluence of support from a multi-month uptrend line and 50-day SMA. Those who take a position here should consider booking profits on a test of the 52-week high at $57.58 while protecting downside with a stop-loss order placed beneath the May 22 low at $38.98.
Steel Dynamics, Inc. (STLD)
Steel Dynamics, Inc. (STLD) operates as a steel producer and metal recycler in the United States. While the company noted a significant decline in first quarter steel orders from the auto and energy sectors, it reiterated that the sector's longer-term fundamentals remain in place. Cash on hand grew 28% to $1.24 billion in the March quarter, providing the firm with ample balance sheet liquidity to fund future projects. Trading at $26.42 with a market value of $5.56 billion and issuing a 3.91% dividend yield, the stock has added 42.32% in the past three months, outperforming the steel industry average by nearly 14% as of June 15, 2020.
Buyers defended the $26 level last week, where the shares find a floor of support from a horizontal trendline that connects an array of price action over the past year. Those who decide to buy the stock at current levels should place a stop order underneath the 50-day SMA and target a run-up to crucial overhead resistance at $34.50. Protect trading capital by raising the stop to the breakeven point if price closes above the June high at $29.98.