Why Steel Is A Top Stock Industry For Investors Right Now
Zacks Investment Research | Apr 24, 2017 03:51AM ET
The steel industry is finally back on track after a long detour. Improving steel prices, favorable developments on trade cases and President Trump’s infrastructure spending promises are among the key factors that have put the wind back into the sails of the steel industry.
The bullish Zacks Industry Rank of 17 carried by the Zacks categorized Steel-Producers industry is a testimony to the fact that steel stocks are back in favor. The favorable rank places the industry in the top 7% of the 250+ groups enlisted.
The Steel-Producers industry has also outperformed the broader market in the past year. The industry has gained around 25.6% in this period, higher than the S&P 500’s corresponding return of 12.2%.
Moreover, valuation also looks attractive for the steel industry. Going by the EV/EBITDA multiple (a preferred valuation metric for cyclical industries like steel) steel stocks appear inexpensive at this point. The steel industry has a trailing 12-month EV/EBITDA multiple of 7.06, which compares favorably to the S&P 500 EV/EBITDA multiple of 10.78. The industry’s lower-than-market positioning calls for some more upside moving ahead.
What's Driving the Rebound?
One of the major factors that have fueled a recovery in the steel sector is favorable developments on a number of trade cases that led to a decline in steel imports. Affirmative rulings in these cases have been be a positive catalyst for the U.S. steel industry. Steel imports fell around 15% year over year in 2016 on the back of punitive trade actions that led to levy of tariffs on imports.
The U.S. Department of Commerce (DOC) recently raised duties on imports of oil country tubular goods (“OCTG”) from South Korea to a range of 2.76% to 24.92% from the earlier range of 4% to 6.5% determined in Oct 2016.
The DOC, last month, also issued positive final rulings in its anti-dumping duty investigations on imports of carbon and alloy steel plates from eight countries. The U.S. International Trade Commission (ITC) is scheduled to make its final injury ruling on this case in May.
Donald Trump’s aggressive trade policies are also expected to provide more protection to the U.S. steel industry. American steel makers recently commended the Trump Administration's executive actions geared at improving duty collection and further identifying and addressing root causes of unfair trade practices that have cost the U.S. government billions of dollars in lost revenues. The executive order directs U.S. Customs and Border Protection (“CBP”) to chalk out a plan to lessen importer fraud and ensure adequate duty collection.
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U.S. steel makers also hailed the Trump Administration's recent move to start a Section 232 investigation on the threats to national security as a result of unfair and illegal trade practices by overseas steel producers.
Trump’s infrastructure spending promises have also painted a bullish picture for American steel makers. Trump's call for $1 trillion of new infrastructure spending is likely to give the steel industry a shot in the arm given the expected increase in steel consumption.
Steel makers are also gaining from a recovery in steel prices. Steel prices have rebounded on the back of trade actions, reflected by a significant increase in hot-rolled and cold-rolled steel prices. Higher costs of steel-making inputs such as iron ore and coking coal have contributed to a recovery in prices.
China’s actions to reduce its excess steel supply are also expected to lend support to steel prices in 2017. The world’s largest steel producer has pledged to cut its steel production capacity by around 50 million metric tons in 2017.
Continued momentum in the automotive space and a recovery across housing and commercial construction markets have been other key tailwinds for the steel industry.
The World Steel Association, in a recently published report, said that it expects global steel demand to expand 1.3% in 2017 after a 1% growth last year. Demand in emerging and developing economies (barring China) is expected to rise 4% this year. Sustained recovery in developed economies and continued growth in emerging economies are expected to help keep the global steel industry on a positive growth path in 2017.
4 Steel Stocks Worth a Look Now
As the steel industry fundamentals are improving, it would be a prudent idea to invest in steel stocks that have compelling prospects and are well poised to run higher leveraging improving steel market conditions. We highlight the following four steel stocks, armed with a solid Zacks rank, that are worth considering for investment right now.
United States Steel Corporation (NYSE:X)
Headquartered in Pittsburgh, PA, U.S. Steel is a solid choice with a Zacks Rank #1 (Strong Buy). You can see Zacks Investment Research
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