Commodities & Metals

3 Steel Stocks to Buy as Major Tariff Deal Is Approved With Canada and Mexico

Lee Jackson

Published: May 23, 2019 7:41 am

Last Updated: January 30, 2020 8:28 pm

Despite that the media continuing to hound the president over the U.S. stance on trade with other nations, the fact of the matter is the country has been mauled by other nations for almost 80 years. However, given our economic power and thriving economy, we hold the cards, and recently an important deal was reached with Mexico and Canada. Not only is it good for the steel companies, but the steel and aluminum issues being resolved should greatly improve the chances for ratification of the USMCA trade deal that is replacing NAFTA.

Canada and Mexico have reached a deal with the United States to remove tariffs on steel and aluminum. The United States imposed tariffs to steel (25%) and aluminum (10%) from Canada and from Mexico in June 2018, citing national security interests. Canada and Mexico then retaliated with tariffs to U.S. products, including metals.

A new Jefferies report, while positive overall, the analysts do feel there could be some near-term pressure, and therefore the firm remains conservative for now. The report noted this:

Following the removal of steel tariffs within NAFTA, we see potential downside to steel prices near term as trade flows and supply chains normalize and advise investors remain defensive with our top picks. Medium term, however, increased flat rolled export opportunities could bode well for certain companies and integrated mills, and broadly we see the policy shift as a net positive.

Three Buy-rated stocks are the top picks at Jefferies, and all make sense for growth accounts looking to play not only the sector but the positive headline news. Plus, all three include solid dividends, which can help as investors wait for the sector to turn.

Commercial Metals

Shares of this lesser known steel company provide 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 are paid a 3.23% dividend. The Jefferies price target on the shares is $21, while the Wall Street consensus target is $21.15. The stock closed Wednesday’s trading at $14.88 a share.

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 always has 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 are paid a solid 3.03% dividend. Jefferies has a price target of $67, but the posted consensus target is slightly higher at $68.54. The stock closed at $52.88 on Wednesday.

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 are paid a 3.30% dividend. The $40 Jefferies price target is right in line with the $40.58 consensus figure. The stock closed most recently at $29.05 per share.

Investors should remember that initially there could be some downside pressure on pricing near term, but the removal of tariffs is critical for U.S. exports, especially to Mexico, and the long-term outlook should improve dramatically. Plus, the approval of the new trade deal would be an overall positive as well.

It is important to note these stocks could remain weak as the president has backed away from discussions with the Democrats on infrastructure. While that is probably temporary, the rhetoric may be loud, so scale-buying positions makes sense.