3 Steel Stocks That Will Give Back All Of The Trump Rally

| January 24, 2017 | 0 Comments

steelSteel stocks have been the revelation of 2016, but gravity won’t be denied

Few markets, including the never-boring precious metals complex, have had a profound turnaround quite like steel stocks. In the early fall of 2014, steel stocks — using the exchange-traded-fund Market Vectors Steel (ETF) (NYSEARCA:SLX) as a benchmark — were holding up well. That, however, changed dramatically. By the end of that year, the SLX dropped more than 25% in market value. The pain worsened in 2015, with the steel stocks ETF shedding nearly 41%.

It was only natural that investment analysts took a dim view towards the industry. Of primary concern were American steel stocks. Their forward-looking valuation was dimmed considerably by cheap, Chinese steel that exacerbated a global supply glut. Even European producers voiced harsh criticisms towards the Asian giant machinery. The question, of course, was why would anyone pay full retail for steel when China was always on discount?

But then a strange thing happened. Economic data in the U.S. and other parts of the world started to improve. Demand began to pick up, resulting in an extraordinary recovery in steel stocks. The 2016 election cycle focused on the industry as a symbol of American manufacturing might. Donald Trump, though, took the most advantage of the populist appeal, which ultimately secured him victory. In the ensuing Trump rally, steel stocks soared under his promise to make America great again.

However, in recent weeks, individual steel stocks have demonstrated a sudden lack of enthusiasm. While this could be a natural correction, there are warning signs that the sector could give back all of the gains from the Trump rally — and then some. For starters, there’s evidence that China has imported significantly more iron ore — which is used to make steel products — than they actually consumed. Consequently, the outlook by Credit Suisse for steel stocks is now pensive.

The message is clear: The Trump rally was one of the most remarkable developments in modern American history, but you can’t cheat gravity, which is why investors need to steer clear of steel stocks. With that in mind, here are three steel stocks that investors should consider selling.

Steel Stocks to Sell: AK Steel Holding Corporation (AKS)

Headquartered in West Chester, Ohio, AK Steel Holding Corporation (NYSE:AKS) is one of the premiere names in steel stocks, employing 8,500 people.

Despite its pedigree, AKS has endured one of the most volatile periods in its history. In the summer of 2014, AKS stock briefly traded for over $11 a pop. By January of last year, AKS dipped below the $2-mark. Rightfully, people questioned whether the company was going to meltdown.

Thanks to bullish momentum speculating on an economic recovery, AKS engineered a near-miraculous turnaround. For 2016, the company secured eye-popping profits of over 334% — something more familiar to tech investors or Bitcoin fanatics. Of significant note is that since Nov. 8 of last year, the Trump rally tacked on 60% to the fortunes of AKS.

So why shouldn’t buyers continue to jump in on the company? Isn’t the trend my friend? The latter is a true statement, so long as the trend is holding. But even though 2017 is young, AKS is down 6%. And I don’t think it’s just a matter of lucky investors taking profits off the table. The outlook for steel stocks in general doesn’t look great.

Furthermore, the Dow Jones Industrial Average has, as of this writing, failed to hit 20,000 points, let alone build substantive gains off that level. The Trump rally is faltering, which also doesn’t bode well for steel stocks.

I think investors are better served taking a page out of NFL great Peyton Manning’s playbook — quit while you’re ahead.

Steel Stocks to Sell: United States Steel Corporation (X)

Centered in Pittsburgh — the heart of steel and Trump country — United States Steel Corporation (NYSE:X) is the powerhouse name among steel stocks. Employing over 33,000 workers, X wields considerable economic and political leverage.

It was companies like U.S. Steel that helped turn the tide for the real estate mogul turned President-elect. Let’s face it — Trump won Pennsylvania by a very slim margin.

There’s no doubt that steel workers have high expectations from the upcoming administration. The Trump rally has partially rewarded their faith. But since gaining an incredible 59% from election day to the end of 2016, X stock hit a snag. Shares are only up 0.27% to start the new year, trending just barely above its 50-day moving average. Against the high of Dec. 8, X stock has shed a disconcerting 12%.

Is the Trump rally no longer a relevant factor for major steel stocks like X? I don’t want to be alarmist, but I think it’s fair to say that the fundamentals aren’t favorable. If indeed China has bitten off more iron ore than they can chew, price deflation is virtually guaranteed. And in such circumstances, the original question asked of steel stocks is more relevant than ever: who is going to pay full retail?

If you’ve won big in this sector, congratulations! Now the best idea from here on out would be to secure those profits into cold, hard cash.

Steel Stocks to Sell: Reliance Steel & Aluminum Co (RS)

At first glance, Reliance Steel & Aluminum Co (NYSE:RS) looks so much different than the other steel stocks on this list.

First, its corporate center calls Los Angeles home. This is about as far away as you can get from Trump country. Second, much like LA’s dynamic demographic, RS has a much more diversified business. Since RS is less beholden to any one market, it hasn’t shed nearly as much blood as most other steel stocks.

In fact, RS shares are up 0.26%. I understand that’s not saying much, but it’s a remarkable contrast to the competition. So why cast doubt on RS? I don’t like the fact that since receiving a good sized boost from the Trump rally, RS has largely moved sideways. From Dec. 8, RS is actually down more than 8%. So it has largely been a matter of trading (small) licks over the trailing month — whatever happened to the confidence of making America great again?

I have a feeling that over the next four years, we will decisively learn that being a good businessman doesn’t necessarily translate to being a good economist. While a President Trump will undoubtedly save American jobs, what will be the broader cost? American labor compared to the developing world is hellishly expensive, and a stronger dollar exacerbates everything. I sympathize with Trump’s intentions, but you know where that paved road leads.

RS is a stellar company, but even they can’t overcome a tidal wave of ugly fundamentals.

 

Note: This article originally appeared at investorplace.com.  For more information about stocks to sell, click here…

The author of this article is Josh Enomoto. As of this writing, Josh did not hold a position in any of the aforementioned securities.

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Category: Industrial Metals

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The author of this article is a contributor to InvestorPlace.com.

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