Commodities & Metals

Steel Stocks to Stay Hot as Fundamentals Stay Strong: 4 to Buy Now

Lee Jackson

Published: May 24, 2017 8:15 am

Last Updated: January 12, 2020 11:43 am

One industry that has come surging back into prominence is steel, and the U.S.-based companies appear to be in the best position they have been in years. Fundamentals remain strong, especially with imports being limited. Then factor in extremely strong demand and very lean inventories, which Wall Street analysts feel can support prices even as some of the demand from the automobile companies weakens.

In a new report, the analysts at Merrill Lynch remain very positive on the industry, though they do pare back their pricing forecasts to $615 per ton from $650. They also feel that the top domestic companies are in very good shape and, although they slightly lower price targets on four stocks that are rated Buy, they remain positive for balance of 2017.

AK Steel

This company has sold off recently and offers investors a solid entry point at current levels. AK Steel Holding Corp. (NYSE: AKS) produces flat-rolled carbon, stainless and electrical steel, and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled and hot-rolled carbon steel products, as well as specialty stainless and electrical steels in sheet and strip forms.

The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial and construction markets; it buys and sells steel and steel products and other materials; and it produces metallurgical coal from reserves in Pennsylvania.

The Merrill Lynch price target for the stock is $10. The Wall Street consensus price objective is just $8.63. The shares closed Tuesday at $6.03 apiece.

Commercial Metals

Shares of this lesser known company provides solid value for investors at current trading levels. Commercial Metals Co. (NYSE: CMC) manufactures, recycles and markets steel and metal products, and related materials and services in the United States and internationally.

As one of the leading suppliers to the nonresidential construction sector, Commercial Metals has revived as that area of the market has picked up. The U.S. Architecture Billings Index (ABI), an economic indicator that provides 9-to-12-month growth forecast of nonresidential construction spending activity, which has shown very consistent growth.

Shareholders receive a 2.52% dividend. The $21 Merrill Lynch price target is the same as the consensus target. The shares closed Tuesday at $19.05.

Nucor

This top steel company should do very well if the economy sees a continued solid pickup this year and the administration’s infrastructure push remains in place. Nucor Corp. (NYSE: NUE) and its affiliates are manufacturers of steel products, with operating facilities primarily in the United States and Canada. The company also is North America’s largest recycler.

Nucor products produced include: carbon and alloy steel, in bars, beams, sheet and plate; steel piling; steel joists and joist girders; steel deck; fabricated concrete reinforcing steel; cold finished steel; steel fasteners; metal building systems; steel grating and expanded metal; and wire and wire mesh.

While the residential construction market could slow down some in 2017 after years of a very torrid pace, top Wall Street analysts remain positive on nonresidential commercial construction. Nucor always has kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond, especially of a huge infrastructure build-out becomes a reality.

Nucor investors receive a 2.58% dividend. Merrill Lynch has a $73 price target. The consensus target is $69.10, and the stock closed Tuesday at $58.64.

Steel Dynamics

This is another company that Merrill Lynch is very positive on, especially if a border tax is put in place. Steel Dynamics Inc. (NASDAQ: STLD) operates six steel mini-mills in Indiana, Virginia, Mississippi and West Virginia. Production capacity has been nearly 10 million tons, of a total 110 million U.S. capacity.

The company makes flat rolled products, special/merchant bars and structural steel products. Steel Dynamics can process about 7 million tons of ferrous scrap and has a downstream operation that processes finished steel.

Shareholders are paid a 1.76% dividend. The Merrill Lynch price target is $40. The consensus target is $43.38. The stock closed most recently at $35.28.

Steel prices are expected to remain solid in 2017 and beyond, and the potential for some trade barriers to foreign steel could also prop up things. The huge energy and infrastructure growth may not be fully priced in now, but it will be soon enough, so any pullbacks may be buying opportunities.