Steel stocks have had big gains so far this year.
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Steel stocks have been on an incredible run so far this year, boosted by rising steel prices. But now that the rally is entering a second leg, J.P. Morgan believes investors need to be choosier about what steel stocks they pick.
Analyst Michael Glick launched coverage of U.S. steel stocks on Wednesday with a two-pronged message: There’s opportunity for more gains, but not all stocks will be winners. In two words, Buyer, beware.
Sorting through the stocks isn’t easy, through, because shares of all major U.S. steel producers are up year to date.
Stock in producers that make steel mainly from remelting scrap in electric furnaces have done the best. Nucor (ticker: NUE), Steel Dynamics (STLD) and Commercial Metals (CMC) are up 88%, 66% and 53%, respectively, far better than comparable gains of the S&P 500 and Dow Jones Industrial Average.
And the performance of traditional steel producers—they make steel mainly from iron ore and coal—is nothing to sneeze at either. United States Steel (X), Cleveland-Cliffs (CLF), and ArcelorMittal (MT) are up 54%, 54% and 32%, respectively.
The pandemic is what triggered the run-up, producing a “perfect storm” for steel markets, according to Glick.
Prices for hot rolled coil, a key benchmark, are up about 65% year to date and up 224% over the past year. Even now, they’re still close to their 52-week high of $1,680 a ton.
“The current pricing market is characterized by a historically tight supply/demand setup,” wrote Glick in his research report. “With the only parallel perhaps being a brief period during the buildup of materiel leading into World War II.”
Glick doesn’t expect supply to catch up anytime soon. He projects hot rolled prices will average $1,470 a ton this year and $920 in 2022. The 10-year average price for hot rolled coil is about $625 a ton.
Falling commodity prices makes picking commodity-related stocks harder. Here are Glick’s recommendations: He favors Steel Dynamics and Cleveland-Cliffs, rating them Overweight—J. P. Morgan’s equivalent of Buy. And he rates U.S. Steel Underweight, essentially Sell.
Cleveland-Cliffs has both traditional blast and electric furnaces, and mines its own iron ore, all points that Glick likes. He also believes value can be created as the company pays down debt from two recent acquisitions. His price target is $39 a share.
Glick considers Steel Dynamics to be one of the “highest quality” players in the remelting game. He likes the company’s recent capacity expansions and low-cost structure. His price target is $107.
Glick’s Underweight rating on U.S. Steel stock is relative. Things are better for the company than they have been in years, but the analyst simply likes other stocks better. His price target is $41, above where shares are trading.
Because of the lukewarm call, shares of U.S. Steel were down 4.6% in afternoon trading Wednesday. Steel Dynamics and Cliffs shares were also down—1.8% and 2%, respectively.
All steel stocks were down, perhaps because of Nucor The largest producer in the U.S. was down 2% despite guiding investors to second-quarter earnings of roughly $4.65 a share—a record and well over Wall Street’s forecast of $4.50. Though a positive surprise, the guidance apparently wasn’t enough for investors.
Glick’s call aligns with his peers. Only 31% of analysts covering U.S. Steel stock rate shares Buy. The average Buy rating ratio for stock in the S&P is about 55%. That’s about the percentage of analysts rating Cliffs stock Buy. Steel Dynamics is the most popular of the three. About 77% of analysts rate its shares Buy.
Write to Al Root at [email protected]
