The steel industry is an interesting one to observe and analyze. Steel is considered one of the basic building blocks of development and economic growth. So it would stand to reason that the steel industry moves in tandem with the economic cycle. In reality, however, that is not how the steel industry operates. As a result, various players in the industry may still have room to run.

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A Lagging Cycle
While steel is clearly at the mercy of the business cycle, it actually lags the business cycle. When the U.S. succumbed to a recession in the fourth quarter of 2007, the steel sector continued to show signs of growth and expansion. Profits actually peaked during 2008. It wasn't until the end of the year, which we now know was actually the tail end of the recession, that the steel industry began showing signs of contraction. So even as the U.S. and other parts of the world were clearly climbing out a recession in 2009, the metals industry continued to face sluggish demand and a weak pricing structure. So while many businesses and industries seem to be operating close to full throttle, steel demand could just be getting started. (For more, see Is Now The Time To Invest In Steel?)

Choose Carefully
Even if the steel industry is getting started on a clear path of increasing demand, I would choose my names very carefully. If the Great Recession reinforced anything at all, it's that too much debt is like dynamite. If you manage that debt inappropriately or get caught being careless, that debt will explode in your face. General Steel Holdings (NYSE:GSI) is a $160 million market cap company with over $600 million in net debt. Despite trading for an estimated 6 times forward earnings, I would focus more on the balance sheet than the income statement. On the other hand, small cap Ampco Pittsburgh (NYSE:AP) has no debt and over $45 million in cash. Insiders own over 16% of the shares. Ampco produces long steel rolls in addition to industrial air pumps and heating coils for the commercial construction industry. On the other side of the pond, Latin America's Ternium Steel (NYSE:TEX) also has a pristine, debt-free balance sheet and a decent valuation of 12 times forward earnings. (For more, see The Stealth Rally In Steel.)

One of the more efficient operators in the U.S. is mini-mill steel operator Nucor (NYSE:NUE). Over the past few years, the company has battled through the declining demand and price of steel brought about by the recession. On as statistical basis, shares don't appear relatively cheap but if the cycle is on a path upward over the next few years, Nucor's low cost operations will benefit.

Be Careful With Cycles
Buying cyclical stocks at the right time can be a fertile investment strategy, but it requires more than just trying to time a cycle to benefit. You want to identify the most efficient and best managed businesses in order to exploit the benefit of a cyclical upswing. (For more, see The Ups And Downs Of Investing In Cyclical Stocks.)

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