Commodities & Metals

China Trade Settlement Could Be Huge for Steel Stocks: 4 to Buy

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The ongoing discussions between the United States and China concerning trade and tariffs drag on, but it is starting to look like some agreement may be on the horizon. In addition, lawmakers are looking to ratify the USMCA, which will replace NAFTA for trade between the United States, Mexico and Canada. One industry that could benefit from all these issues being settled is steel, and despite some promising potential catalysts, one firm remains cautious.

Jefferies analysts that cover steel stocks have met with noted steel import expert John Foster, who said it is likely U.S. imports will step down around the May to June time frame, which could provide some supply-side relief. The analysts noted this in their report:

Demand for steel within the U.S. remains fair to good according to Mr. Foster. He does note, significant uncertainty among buyers due to unknown policy changes from the administration. As a result, buyers are not willing to take inventory risk and ample domestic capacity and low lead times have allowed this.

With trade deals and policy still up in the air, the analysts suggest that investors stay conservative for now. But these four stocks are rated Buy and make sense for accounts looking to add what could be a solid value play at current levels, and maybe a big home run if a trade agreement is completed.

Commercial Metals

This lesser known stock 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, an economic indicator that provides a growth forecast of nonresidential construction spending activity nine to 12 months out, has shown very consistent growth, and that bodes well for the company.

Shareholders receive a 2.67% dividend. The Jefferies price target on the shares is $21, while the Wall Street consensus target is $21.15. The stock closed Tuesday at $17.95.

Nucor

This top steel company could continue to do very well if the economy sees continued strength this year and nonresidential construction grows. Nucor Corp. (NYSE: NUE) is one of North America’s largest steel producers, with almost 27 million tons of finished steel capacity at 23 mini-mills throughout the United States. The company’s downstream steel products business includes rebar fabrication, steel joists/deck, cold finished bars, fasteners, building systems and wire mesh. Nucor also has 5 million tons of scrap processing capacity.

Nucor has always kept a very conservative balance sheet and is poised for slow but steady growth next year and beyond, especially if a huge infrastructure build-out becomes a reality. In addition, global weather catastrophes have also helped continue to drive the need for steel products.

Nucor investors receive a 2.75% dividend. Jefferies has a $68 price target, while the consensus target is $67.85. The stock closed at $58.22 on Tuesday.

Reliance Steel & Aluminum

This is a top Service Center play that the Jefferies team is positive on. Reliance Steel & Aluminum Co. (NYSE: RS) provides metals processing services and distributes a line of approximately 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium, and specialty steel products. Its primary processing services comprise cutting, leveling, sawing, machining, and electropolishing.

The company also fabricates and distributes structural steel components and parts; provides metal components and inventory management services; distributes alloy, carbon, and stainless steel bar and plate products; and steel and nonferrous and aerospace metals, including aluminum, steel, titanium, nickel alloys, and aluminum bronze, offering full or cut to size materials

Reliance is the largest metals service center company in North America, operating in more than 200 locations. About half of its business is warehousing and the other half involves some sort of value-add processing or fabricating. Non-ferrous volume comprises about 30% of its annual shipments. The company tends to sell small spot priced tons to customers, the majority requiring delivery within 24 hours.

Shareholders receive a 2.41% dividend. The $105 Jefferies price target is well above the $94.13 consensus figure. The stock closed most recently at $91.69.

Steel Dynamics

Jefferies remains very positive on this company as well. 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 receive a 2.82% dividend. The Jefferies price target is $41. The consensus target is $41.04, and shares closed at $34.06.

With pricing potentially firming, and export potential and demand at home still strong, all these stocks make sense for growth investors, especially after stock price pullbacks from last summer’s highs. A big congressional or White House initiative for an infrastructure build-out could significantly move the sector as well.

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