Is It Time To Invest In Steel Stocks?

Larry Davidson - October 30, 2018

Economics and politics influence the steel sector greatly. That said, steel stocks have gone through a roller coaster ride of ups and downs ever since Donald Trump was elected President of the United States.

One of the big campaign promises Trump made was rebuilding America’s infrastructure. Also, bring back manufacturing and recover jobs lost in the industry.

When Trump got elected, the stock market rallied, especially steel stocks. However, the industry was still facing many challenges including cheap imports.

steel stocks steel production

US steel production has been declining since the 1970s, but that hasn’t deterred the President from trying to revitalize the industry. In 2018, President Trump put a 25% tariff on steel imports.

The price of steel skyrocketed after the announcement.

steel pices steel stocks

The tariff’s give US-based steel companies a chance to be more competitive.

U.S. Steel  Corporation (NYSE: X) announced that it would be investing $750M to revitalize its flagship plant in Gary, Indiana.

Despite the shift in sentiment, some analysts believe that the tariffs will only create a short-term boost for the industry. Other factors to consider is the overall health of the economy, politics,  and rising interest rates.  Of course, supply/demand of steel will also play a role in how steel stocks trade.

The Best Domestic Steel Stocks

Nucor Corporation (NYSE: NUE) is the largest steel producer in the United States as well as North America’s largest recycler. The company has 25 scrap-based steel mills with an annual production capacity of 27M tons.

It operates in three segments: Steel Mills, Steel Products, and Raw Materials. The company has approximately 200 locations and employees over 25k people.

Nucor pays its investors an annual dividend of  $1.52 per share. Also, there are listed options on the stock, which offer a way for investors to hedge and traders to speculate.

Steel Dynamics Inc (NASD: STLD) is one of the most diversified, vertically connected steel companies in the industry.  It operates through three segments: Steel Operations, Metals Recycling Operations, and Steel Fabrication Operations.

The company generates the majority of its revenue from steel operations. That said, metals recycling and steel fabrication accounted for less than 25% of the firm’s revenues in 2017.

Steel Dynamics pays its investors a dividend of $0.75 per share. You can also trade options on STLD.

zeus steel stocksOlympic Steel, Inc. (NASD: ZEUS) processes and distributes metal products. It operates its business in three segments including carbon flat products, specialty metals flat products, and tubular and pipe products.

The company has 31 facilities with more than 3.7M Sq. Ft.  in the U.S. and Mexico. It has a rich history; its flat-rolled metal service center first opened in 1954.

Olympic Steel offers its investors a dividend. Also, there are options listed on the stock, allowing investors ways to hedge and generate additional income from writing calls against their equities.

The Best International Steel Stocks

Tenaris S.A. (NYSE: TS) produces and sells seamless and welded steel tubular products and related services. Its clients come from the energy industry and industrial applications.

Based out of Luxembourg, the company operates a worldwide network of steel pipe manufacturing, research, finishing and service facilities. Tenaris has operations in Europe, Asia, Africa, and the Americas.  At the end of 2017, Tenaris had more than 21K employees across the globe.

Its CEO, Paulo Rocca, has been listed among the top 100 best-performing CEOs by Harvard Business Review for six consecutive years.

The company pays a dividend of $0.82 per share. Also, listed options on the stock are available for investors and traders.

mt steel stocks
Source: ArcelorMittal

ArcelorMittal (NYSE: MT)  owns and operates steel manufacturing facilities in Europe, the Americas, Asia, and Africa. It is one of the largest steel and mining companies in the world, it employees more than 197K people globally.

The company was formed in 2006 after Mittal Steel and Arcelor merged, together creating the world’s largest steel company.   It’s since been racking up the accolades. For example, Honda R&D Americas awarded ArcelorMittal with its Excellence in Innovation Award. That said, it has received awards from General Motors, Ford, and Jaguar Land Rover.

Option traders will be excited to find out that you can trade them on ArcelorMittal. The company also pays out a small dividend to its investors.

POSCO (NYSE: PKX) is the first integrated steel mill in Korea; it produces 41M tons of crude steel a year.  It operates its business through four segments that include steel, construction, trading, and others.

POSCO offers a diversified product line that includes hot and cold rolled steel, steel plates, wire rods, galvanized and electrical galvanized steel, electrical and stainless steel, automotive materials, titanium, magnesium, and aluminum-plated products.

Steel Stocks – An ETF Approach

For some investors, buying a specific sector ETF is a more straightforward approach than selecting individual stocks. Not only is it cheaper but its also a diversified approach.

VanEck Vectors Steel ETF (NYSE: SLX) is designed to replicate the price and yield performance of the NYSE Arca Steel Index. In other words, the ETF’s goal is to track the performance of steel companies.

Its top holdings include Rio Tinto, Vale, Ternium, Vedanta, Tenaris, ArcelorMittal, United States Steel Corp, Gerdau, POSCO, and Nucor.  There are less than 30 names in the ETF. Its top ten holdings consist of approximately 70% of the portfolio.

The majority of the stocks in the portfolio are from the United States followed by Brazil, the Netherlands, and Australia. Most of the companies in the ETF come from the materials sector.

It charges a management fee of 0.50% and has a gross expense ratio of 0.62%.

SPDR S&P 500 Metals & Mining ETF (NYSE: XME) is not a pure play on the steel industry, but more than half the portfolio is in steel names. The fund tries to provide investment results that resemble the total performance of the S&P Metals and Mining Select Industry Index.

The stocks in the fund come from industries like aluminum, coal and consumable fuels, copper, diversified metals and mining, gold, precious metals and minerals, silver, and steel.

Some of its key holdings include Allegheny Technologies Incorporated, Nucor, Reliance Steel & Aluminum, United States Steel Corporation, Cleveland-Cliffs, and AK Steel Holding Corporation.

The ETF has been around since 2006, is optionable, and has a gross expense ratio of 0.35%

How To Trade Steel Stocks

You want to buy and sell stocks that are liquid. In other words, the more shares of the stock trade, the better the likelihood that the bid/ask spreads will be competitive.

aks steel companies
Source: Yahoo

For example, AK Steel Holding Corporation (NYSE: AKS) trades tens of millions of shares daily, making it one of the most actively traded steel companies in the market.

On the other hand, Olympic Steel’s stock on average trades less than 100,000 shares per day.

olympic steel stocks
Source: Yahoo

You could use liquidity events like an earnings release or news catalyst to scale in and out of a significant position. Also, for stocks like Zeus, traders can play them with options too.

However, if you’re a day trader, you’ll want to wait for a catalyst before jumping into a thinly traded steel stock.

Catalysts in the sector include politics, like the Trump tariffs. For example, if the infrastructure plan ever gets off the ground than it could be very positive news for the steel sector. On the other hand, if the tariffs go away or the infrastructure plan never gets signed, then steel stocks could perform poorly.

That said if you’re an investor than consider trading steel stocks that are optionable. You can trade options on ArcelorMittal, POSCO, Nucor, Steel Dynamics, US Steel Corp., AK Steel Holding, Tenaris, Olympic Steel,  and to name a few.

VanEck Vectors Steel ETF is also optionable.

Bottom Line

Demand for steel from the auto industry expects to be strong as several manufacturers are transitioning to electric and hybrid cars over the coming years.

That said, if interest rates rise, businesses might be reluctant to start new projects, potentially causing a slow down in the economy. An economic downturn will have a negative impact on steel stocks.

However, if economic conditions are favorable, steel stocks become attractive, especially when many of the best companies pay investors a dividend.

Larry D. is one of the most experienced writers at the Dork. His expert insights into the individual stocks have made small fortunes for some of his readers and profitable trades for many more. Best known for his work with under-the-radar growth stocks, Larry has been picking winners for over 30 years.

Leave a Reply

Your email address will not be published. Required fields are marked *