Best Steel Stocks To Buy In May

Key Insights

  • Steel stocks have recently suffered a serious pullback, which pushed them to more attractive valuation levels. 
  • India decided to impose export tariffs to keep domestic steel prices at bay, which is bullish for global steel markets. 
  • Analyst estimates keep moving higher, so Cleveland-Cliffs is trading at less than 6 forward P/E after the recent pullback. 

India has recently imposed export tariffs on steel producers, providing support to global steel markets and U.S. – based steelmakers. Steel stocks have suffered a strong pullback in the last two months, but now they have a good catalyst for a potential rebound.

Cleveland-Cliffs

Analyst estimates for Cleveland-Cliffs have continued to move higher despite the recent pullback of the stock. The company is expected to report earnings of $6.21 per share in the current year and $4.2 per share in the next year, so the stock is trading at less than 6 forward P/E.

Analysts remain skeptical about the company’s ability to keep current profits in the next year, but it looks that commodity rally could last longer due to geopolitical tensions and supply chain issues. Cleveland-Cliffs stock has a decent chance to rebound from current levels due to potential multiple expansion as the current valuation levels look too cheap.

U.S. Steel

U.S. Steel has also been under significant pressure in recent weeks. Analysts expect that U.S. Steel will report earnings of $11.49 per share in the current year and $3.37 per share in the next year, so the stock is trading at less than 8 forward P/E.

It should be noted that analyst estimates for the next year have recently started to fall. U.S. Steel faced some disruptions in Slovakia as coal deliveries from Russia were stopped, but the company has enough time to find alternatives.

Meanwhile, the fundamentals of the steel market remain strong, so U.S. Steel stock has a good chance to gain additional upside momentum in the upcoming weeks and move closer to recent highs.

To keep up with the latest earnings updates, visit our earnings calendar.

Best Steel Stocks To Buy Now

Key Insights

  • Steel prices have moved higher all over the world. 
  • In the U.S., the infrastructure plan should provide additional demand for steel. 
  • Steel stocks gained a lot of ground in 2022, but they continue to trade at reasonable valuation levels. 

Steel stocks had a strong start of this year as problems with steel production in Ukraine and sanctions on Russia have created a tight market in the world. In addition, U.S. President Joe Biden has recently said that U.S. – made steel will be mandated for projects made under the infrastructure plan. In this environment, steel stocks will remain on investors’ radars.

Cleveland-Cliffs

Cleveland-Cliffs stock is up by more than 40% year-to-date, but the company’s shares still trade at a modest 8 forward P/E.

At this point, analysts do not believe that current pricing conditions will remain in 2023, so the analyst consensus predicts that the company’s earnings will decline from $5.89 in 2022 to $3.79 in 2023. However, analyst estimates are rising fast, so Cleveland-Cliffs stock may have more upside without multiple expansion.

Nucor

Nucor stock has also benefited from favorable market conditions and gained about 50% since the beginning of this year. Nucor has historically enjoyed a premium over its peers in the steel industry, and it is currently trading at almost 19 forward P/E.

It should be noted that analysts believe that Nucor 2023 earnings will decline by more than 50% compared to the projected 2022 earnings, and it remains to be seen whether such forecasts are accurate.

U.S. Steel

In the U.S. Steel case, analysts expect that the company’s earnings will decline from $10.8 in 2022 to $3.93 in 2023, so the stock is trading at 9 forward P/E.

Analyst estimates for the year 2023 have been moving higher in recent weeks, and the continuation of this trend should provide additional support to U.S. Steel stock.

For a look at all of today’s economic events, check out our economic calendar.

U.S. Steel Soars to Three-Year High

U.S. Steel Corp. (X) is benefiting from the rapid rise in worldwide steel prices, which is overcoming expensive raw material and operating costs. The Russia-Ukraine war has stoked buying interest, lifting the steelmaker to a three-year high. It’s posted extraordinary gains in the last seven weeks, rising 79% into the low 30s, so prospective buyers may wish to sit on their hands and wait for a pullback to new support in the mid-20s.

Robust Pricing vs Rising Costs

Analysts have been raising targets in recent weeks but the stock is still valued well below the SP-500 multiple of 19 times forward earnings due to the common view that steel production will hit a profit wall in 2023. As a result, U.S. Steel is valued at less than three times earnings at most investment houses, despite supply disruptions due to the war. This follows a bewildering Wall Street theme that Ukraine is a temporary blip in an otherwise bullish market environment.

Morgan Stanley analyst Carlos de Alba upgraded the stock to ‘Equal Weight’ last week, noting that “escalation of the Ukraine/Russia conflict has prompted a sharp increase in steel metallic prices, including scrap/pig iron. Directly or indirectly we see higher raw material cost inflation for steel names under our coverage. We think U.S. Steel is likely to cope better than peers given its vertical integration into iron ore and comparatively less exposure to electric arc furnaces”.

Wall Street and Technical Outlook

Wall Street consensus stands at a mediocre ‘Hold’ rating based upon 5 ‘Buy’, 1 ‘Overweight’, and 5 ‘Hold’ recommendations. In addition, three analysts recommend that shareholders close positions. Price targets currently range from a low of $23 to a Street-high $50 while the stock is set to open Wednesday’s session less than $2 below the median $34 target. This mid-range placement suggests that U.S. Steel is fairly valued at this time.

U.S. Steel hit an all-time high in 2008 and entered a long-term downtrend, carving lower highs in 2010, 2011, and 2018. It fell to an all-time low in single digits during 2020’s pandemic decline and turned higher, stalling at the .618 Fibonacci retracement of the 2018 – 2020 selloff in May 2021. Aggressive buyers returned after the stock posted a 10-month low in January 2022, ahead of a vertical rally impulse that’s now stretched above the prior peak. Accumulation has surged to a new high at the same time, predicting continued upside into the upper 30s.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

United States Steel (X) Underperforms The Market In A Weaker Economy

  • US Steel’s price pattern is closely related to the business cycle.
  • US Steel underperforms the market when business slows down.
  • US Steel will continue to underperform the market.

It operates through three segments: North American Flat-Rolled (Flat-Rolled), U. S. Steel Europe (USSE), and Tubular Products (Tubular).

The Flat-Rolled segment offers slabs, strip mill plates, sheets and tin mill products, as well as all iron ore and coke. This segment serves customers in the service center, conversion, automotive, construction, container, and appliance and electrical markets.

The USSE segment provides slabs, strip mill plate, sheet, tin mill products, and spiral welded pipes, as well as refractory ceramic materials. This segment serves customers in the construction, container, appliance and electrical, service center, conversion, oil, gas, and petrochemical markets.

The Tubular segment offers seamless and electric resistance welded steel casing and tubing products, as well as standard and line pipe and mechanical tubing products primarily to customers in the oil, gas, and petrochemical markets. The company also provides railroad services and real estate operations.

Chart, histogram

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Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The stock of US Steel shows a well-defined downtrend channel since 2007. The price behavior also shows considerable volatility. This volatility is not a random event. It represents the expectations of US Steel’s performance caused by changes in the business cycle.

The inventory cycle is helpful to explain why the price of US Steel responds to the business cycle.

Source: Profiting in Bull or Bear Markets – How Business Cycles Impact The Financial Markets

Business managers must filter all the news coming from different sources such as pandemics, cartels, supply chain difficulties, foreign or domestic supplier availability, trends in commodities and interest rates, changes in value of the dollar, and the Fed. Eventually they must make a crucial decision: how much to produce to replenish the inventories at levels needed to meet the demand for their goods.

The business cycle transitions through four phases as management changes its inventory policies. In Phase 1 and Phase 2 business decides to build inventories to meet growing demand. This decision results in increases in the purchase of raw materials, hiring more people, increase in borrowing to finance operations and improve and expand capacity.

This is the time the business cycle grows through Phase 1 and Phase 2. This is also the time commodities, copper, iron ore, other metals, crude oil, lumber, agriculturals, interest rates, and inflation rise. The increase in these prices is a testimonial the economy is strengthening.

The problem arises toward the end of Phase 3. The continued rise in commodities, copper, iron ore, other metals, crude oil, lumber, agriculturals, and in overall inflation eventually reduces consumers’ purchasing power in a meaningful way. The consumers’ response is a slowdown in spending.

The outcome is in Phase 3 managers begin to experience rising inventories compared to sales with a direct impact on their financial performance. The need to reduce inventories involves cuts in the purchase of raw materials, reduction in the workforce, and declines in borrowing. This process continues until inventories are in line with demand. The inventory to sales ratio keeps rising during these times as inventories rise faster than sales. During Phase 3 and Phase 4, because of the action of business, commodities, including iron and most metals, decline, wages slow down, and interest rates decline.

When inventories are finally adjusted to the desired level, matching their growth with the growth of demand, the business cycle transitions from Phase 4 to Phase 1. At this point the inventory to sales ratio starts declining again. It reflects sales rising faster than inventories. Business will have to increase production to restock inventories. And the business cycle moves to Phase 1. The markets will respond promptly.

X acts positively to the forces driving the price of iron ore and other metals and labor costs when business is in the process of building up inventories (Phase 1 and Phase 2). This is the time price increases are likely to hold.

However, when the business cycle transitions into Phase 3 and Phase 4, demand for steel-based products such as autos declines, and profitability suffers. The price of the stock weakens reflecting these adverse times.

Sources: StockCharts.com, The Peter Dag Portfolio Strategy and Management

When does the price of US Steel outperforms the market? The above chart gives us the answer.

The above chart shows two panels. The graphs in the above panel represent the ratio between X and SPY. The second graph is its 200-day moving average. The graphs rise when X outperforms SPY. The graphs decline when X under-performs SPY. Investors are going to outperform the market if they invest in X when the graphs rise. The graph also indicates X has underperformed the market at least since 2007.

The bottom panel shows the business cycle indicator, a proprietary gauge updated regularly in The Peter Dag Portfolio Strategy and Management. This indicator is computed in real-time from market data. Its turning points coincide also with the cyclical turning points of the growth of employment in manufacturing and credit spreads.

The relation of X to the business cycle is quite telling. X outperforms the market when the business cycle rises, reflecting stronger economic growth and rising commodity prices. The ratio X /SPY declines, reflecting the underperformance of X relative to SPY, when the business cycle declines, reflecting slower economic growth and lower commodity prices.

The recent weakness in the business cycle indicator suggests X will continue to underperform SPY (the ratio will keep declining).

Key takeaways

  • The business cycle will decline, reflecting slower economic growth. The slowdown is mostly driven by rising inflation, causing the decline in demand due to the contraction in consumers’ disposable personal income after inflation.
  • X will continue to underperform SPY as long as the business cycle indicator declines.
  • The business cycle indicator will rise following a decline of inflation. Growth in M2 must fall from the current 13% to about 6%. Real disposable income will also rise accompanied by improving consumer sentiment (University of Michigan survey).
  • X will start outperforming the market at that time.

Marketmind: The ECB’s Inflation Conundrum

A look at the day ahead from Tommy Wilkes.

Will it or won’t it become the latest central bank to warn that price pressures are more severe — and less transitory — than they appeared a few months ago?

The difficulty for the ECB is that it wants to maintain its ultra-dovish stance to boost the region’s economy, but at the same time, it must face up to inflation expectations that are running at seven-year highs above 2%.

The prospect of slowing economic growth and central bank policy tightening is flattening bond yield curves worldwide — taking longer-dated borrowing costs lower. Europe is no exception, with German 10-year yields on Wednesday seeing their biggest daily drop in eight months.

A busy day for central bank activity elsewhere too. The Bank of Japan delivered another dovish statement, projecting inflation to stay below target for at least two more years. It just reinforces the view it will lag others in dialling back crisis-mode policies.

The Reserve Bank of Australia, meanwhile, skipped a chance to buy a government bond at the heart of its stimulus programme, sending yields soaring above target and raising wagers it will become yet another bank opting for an early rate hike.

Supply chain disruptions continue to dominate the earnings season, with Volkswagen the latest carmaker to report lower-than-expected operating profit, partly because of the chip shortage.

Samsung reported its highest quarterly profit in three years but expect component shortages to affect chip demand.

Stock markets have pulled back, with Germany’s DAX opening 0.2% lower and Wall Street futures only marginally higher.

(For graphic on Euro zone inflation expectations – https://fingfx.thomsonreuters.com/gfx/mkt/xmvjolwdgpr/euro%20zone%20inflation.PNG)

Key developments that should provide more direction to markets on Thursday:

-ECB meeting

-German unemployment/prelim CPI Oct (4.4% Y/Y/ Reuters poll)

-Euro zone consumer inflation expectations Oct

-Norway Central Bank Governor Øystein Olsen speaks

-Emerging markets: Egypt central bank meeting

-U.S. flash GDP Q3 (2.8% Reuters poll)

-U.S. core PCE flash Q3 (4.5% Reuters poll)

-U.S. Initial jobless claims

-U.S. 7-yr note auction

-U.S. earnings: Allegheny, AllianceBernstein, Caterpillar, Comcast, Hershey, Mastercard, Merck, Newmont Mining, Moody’s, Royal Caribbean Cruises, T-Rowe Price, Yum Brands, Amazon, Apple, Gilead Sciences, Starbucks, United States Steel.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Tommy Wilkes, editing by Sujata Rao)

Today’s Market Wrap Up and a Glimpse Into Thursday

This rally may have legs after all. Stocks extended their gains from yesterday’s monstrous rebound, with all three major indices finishing the day in the green. The S&P 500 was up fractionally and inched closer to its all-time high. The Dow Jones Industrial Average gained almost 300 points while the tech-heavy Nasdaq was up nearly 1%.

Corporate America has taken the attention away from the one-two punch of the Delta variant and inflation, as the earnings parade continues to roll on.

Oil is trading above the USD 70 threshold once again after gaining close to 5% on the day. The VanEck Vectors Oil Services ETF climbed higher by 4.5% and is up in extended-hours trading as well. This ETF has also rebounded 10% since its low point on Monday.

Elon Musk and Jack Dorsey were in the spotlight as they participated in “The B Word” event about bitcoin. Musk tipped his hand to his space travel company, SpaceX, owning bitcoin, as does he and Tesla. The attention did little for the Tesla stock price today but bitcoin is having a nice run.

Stock futures are little changed in extended-hours trading.

Stocks to Watch

AT&T will report its Q2 results before the opening bell. The company on Wednesday announced plans to offload Vrio, its Latin American DirecTV arm amid a USD 4.6 billion impairment charge. The telecom giant sold the business to Grupo Werthein.

US Steel advanced 4.5% on Wednesday and is higher in after-hours trading. Since the bottom fell out of the stock market on Monday, US Steel shares are up 12% from their lowest point. Steel prices have been hovering at record highs amid supply constraints, conditions that are expected to persist.

Look Ahead

Existing Home Sales for June come out at 10 a.m. ET. This indicator has been on the decline for four straight months but still hovers at a solid annual rate of 5.8 million units. Wells Fargo economists predict sales moved higher last month to a rate of 6.06 million units thanks to “demand for extra space” coupled with low rates.

The Leading Economic Index (LEI) for June also comes out on Thursday. In light of a “mixed bag of economic data” in recent weeks, Wells Fargo economists forecast that this indicator increased 0.8% last month.

 

Is U.S. Steel Rally Coming to an End?

U.S. Steel Corp. (X) closed just above 26 in Friday’s session after a UBS analyst upgraded shares from ‘Sell’ to ‘Hold’ and doubled the firm’s price target to $30. Weekly options expiration and a month long test at major resistance may have dampened short-term buying interest but the stock is on track to reach the target in the next few weeks. If so, that will mark the highest high since October 2018.

Surging Steel Prices

The stock has risen more than 50% so far in 2021 and more than 150% in the last year, underpinned by steel prices that have risen by an even greater pace. The booming U.S. economy has triggered a surge in demand, allowing the company and its worldwide competitors to aggressively raise prices. However, many industry experts believe that steel prices will ease soon, triggering a reversal in shares that could relinquish a large percentage of yearly gains.

UBS analyst Andreas Bokkenhauser sees things differently and is looking for this commodity cycle to persist longer than many folks expect. He lists supply constraints as the primary price mover and points out that China may impose an export tax that drives down local prices while pushing foreign steel prices higher. However, nothing is certain at this point, which is why the analyst chose a modest upgrade rather than an enthusiastic ‘Buy’ rating.

Wall Street and Technical Outlook

Wall Street consensus has lifted substantially in the last year and stands at a ‘Hold’ rating based upon 3 ‘Buy’, 7 ‘Hold’, 1 ‘Underweight’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of just $14 to a Street-high $35 while the stock closed Friday’s session nearly $4 below the median $30 target. A quick ramp into that level is possible but further gains may be tough, with post-pandemic supply constraints slowly working out of the system.

U.S. Steel hit an all-time high in 2008 and turned sharply lower, posting lower highs in 2010 and 2018. The decline may have ended at an all-time low in March 2020, ahead of a recovery wave that stalled in May 2021 after crossing the midpoint of the 2018 into 2020 selling wave.  This level also marks 200-month moving average resistance, highlighting a substantial barrier that could end the short-term uptrend. Meanwhile, the secular downtrend will remain fully intact until the stock completes a 100% retracement into the 2018 peak at 47.64.

For a look at all of today’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication.