Steel Dynamics: The Perfect Example of a Solid Investment Strategy
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The steel manufacturing industry has taken quite a beating in 2011. The European markets have been dismal and steel prices declined precipitously. Not a good combination to say the least. And industry stalwarts like U.S. Steel (NYSE: X) have taken it on the chin.
However, things are changing for the better for a couple of reasons. First, the price of steel is up significantly in just the last month or so, to the tune of about 25%. And steel shipments were up almost 12% year-over-year through November. These in and of themselves warrant a good look. But it really gets interesting when you take into account the following investment strategy. Which, by the way, is applicable to any number of industries; it’s simply the stars have aligned for steel.
First take a look at industries that, going forward, stand to fare well. As we look forward to 2012 there are a couple that come to mind that fall right in the steel wheelhouse. The U.S. automotive industry is expected to crank out as many as 13.4 million units in 2012, a significant bump from the past two years. As if that weren’t enough, oil and natural gas prices have made drilling for shale oil a profitable enterprise. And with huge shale oil fields in both North Dakota and Texas, next year looks primed for companies involved with the extraction.
So where’s the strategy? If the two industries alluded to above are poised for growth, investors can certainly look at the Ford’s and VW’s of the world for the automotive opportunity. And drilling firms like Transocean (NYSE: RIG) should benefit from drilling. But let’s take this a step further. If more cars are being built, who’s supplying the rolled metal? And if more drilling takes place, who will provide the tubular metal needed to get at the bubbling crude? Yep, steel-making companies that’s who.
Often, going beyond the obvious candidates and looking at the ancillary companies that will benefit from an industry uptick is where the real opportunities lie. And for 2012, that means steel.
A Few Contenders
Don’t be surprised to see U.S. Steel make a nice turnaround in 2012, but there are others worth serious consideration too. One of the best is nearly $3 billion Steel Dynamics (NASDAQ: STLD). In addition to steel products and fabrication, STLD is also big in recycling metals. Investors will also benefit from a nearly 3% dividend.
One of the big boys on the block is Nucor (NYSE: NUE), a nearly $13 billion steel machine boasting a 3.59% yield, though, NUE is trading at over 20 times earnings while Steel Dynamics is an inexpensive 11.93. Conservative? NUE fits the bill nicely. Want a bit more upside? Steel Dynamics for U.S. Steel may be the ticket.
As your research continues you’re certain to come across Luxembourg’s ArcelorMittal (NYSE: MT), one of the largest steel producers in the world. A solid company, outstanding dividend and earnings and on the low end of the P/E scale. A note of caution is the international exposure of this $28.64 billion behemoth. Tons of upside, but may be a bit more susceptible to European foibles than US-based companies.
Whatever you decide, keep the strategy in mind. As the economy slowly regains its footing and more industries and sectors benefit, look beyond the obvious. The fringe can be a profitable place to play.
The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.