Value In Steel Stocks? You Bet!
Steel Stocks Deserve A Close Look…
Without question, the past year and a half downturn in crude oil has been remarkable. With the commodity recently collapsing to 13-year lows under $30 a barrel, a wide swath of the US oil industry is sliding toward bankruptcy.
Of course, the immense uncertainty is showing up in stock prices.
Oil producers like Halcon Resources $HK, Rex Energy $REXX, and Whiting Petroleum $WLL have seen 90% of their market capitalization disappear since June 2014.
Unfortunately, it’s a crapshoot as to whether these companies survive the current downturn.
As a result, I recommend you steer clear of the entire small- and mid-cap exploration space. Instead, focus on the best of breed oil producers with strong balance sheets mentioned a few days ago.
But oil isn’t the only commodity industry suffering right now…
Steel companies are wrestling with one of the steepest industry downturns in decades. In case you’re unaware, the price of steel has collapsed thanks to severe global overcapacity.
Much of that overcapacity comes from China, which produces around 800 million tons of steel a year.
That’s nearly 4 times as much as any other country!
But with the Chinese economy slowing, China’s steel producers are accused of dumping unwanted steel supply on other countries. Not surprisingly, the tactic has sent the price of steel products into the gutter.
With prices languishing, some of the world’s largest steel companies like US Steel $X and ArcelorMittal $MT are feeling the pain. Case in point, US Steel recently reported a Q4 2015 loss of roughly $1 billion- a far cry from the $275 million profit reported a year earlier. Meanwhile, $MT reports earnings on February 12th.
But here’s the deal…
The gloomy situation in the global steel market has already wreaked havoc on the share prices of the two companies mentioned above. In just the past year, $X and $MT have suffered downturns of 70% and 63% respectively.
However, thanks to the selloff, both companies are trading squarely in the discount bin. In fact, $MT trades at an 81% discount to book value while $X trades at a 59% discount. What’s more, both are trading at a mere 9% of sales.
That’s cheap.
Here’s the real upshot…
Industry analysts suspect steel prices will start stabilizing this year.
That’s because steel producers are taking big steps to slash overcapacity. Investors recently learned Chinese steel capacity would be cut by as much 150 million tons this year, costing the country 400,000 jobs in the process.
Folks, when producers finally start throwing in the towel and cut production, it’s a sign the bottom is near. It’s also a signal to start picking up best of breed producers on the cheap.
$X and $MT fit that bill perfectly.
If a diversified investment is more your thing, look to the Market Vectors Steel ETF $SLX. The ETF holds a big handful of companies focused on the global steel industry including $X, $MT, and many others.
And remember, $SLX pays a hefty 5.6% dividend, which means you’ll be paid to wait for the looming bottom in steel!
Until Next Time,
Justin Bennett
***Disclosure*** Editor Justin Bennett has a long position in ArcelorMittal $MT
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.
Category: Commodity Trading
