The indices selloffs are dragging the hot steel stocks down with them
- While the sector is hot, these are three steel stocks to buy on swoons.
- U.S. Steel (X): The relative slacker, which means potential catch-up burst.
- Cleveland-Cliffs (CLF): Approaching support from its prior correction bottom.
- Nucor (NUE): The biggest with the best score.
The equity markets suffered a rout on Wednesday like they haven’t had in a while. The S&P 500 and the NASDAQ fell 4% and 5% respectively. This was a clear win for the bears, and there’s no clear end in sight. Thursday is not looking much better yet, as experts are fretting macroeconomic conditions. Nevertheless, this is the time to doe a bit of investment homework. Today we delve into three steel stocks to buy as soon as there are general market stabilization signs.
The hawkish rhetoric from the U.S. Federal Reserve has demolished investor confidence. Investors are terrified of how badly the recession could be. This week’s retail stocks earnings report fueled that fire. Walmart (NYSE:WMT) and Target (NYSE:TGT) stock collapsed on their earnings reports. Both management teams reined in their forward guidance significantly lower. The tone from them supports having a hostile environment.
The U.S. Fed seems to have adopted a third mandate, which is to invoke panic. And job well done on that front, because at this pace they will need to restart the quantitative easing soon. That’s how their 2018 tightening efforts went. Meanwhile, the current selloffs are creating potential cheap steel stocks to buy.
While they are not absolutely dirt cheap, their stocks have shed enough froth to warrant interest. However, investors would be prudent to only commit partial positions to start.
U.S. Steel (X)
U.S. Steel (NYSE:X) reported a 43% increase in sales from last year late April. Yet the stock is now down more than 25% since then. Clearly X stock investors expected much more. The prevailing theme is that these are special circumstances that are not likely to last forever. The worry is that eventually, business will normalize and management will have to adapt again.
Meanwhile, it is important that they shore up their business while the going is good. Analysts are split on their ratings. But they agree that the stock should be higher. Their average price target is 62% higher than current. While this is good news, therein also lies some risk of bearish headlines.
If X stock doesn’t rally a bit soon, I would imagine some of these experts will need to downgrade targets. Luckily, the price is now falling into support from the Feb. 24 bottom. It served as a hard bounce line for a huge rally then. While I don’t anticipate another 70% increase, the bulls should have a reprieve rebound.
Cleveland-Cliffs (NYSE:CLF) stock is fast approaching support from its prior correction bottom. The February correction from the Ukraine war headline ended just below current levels. That was legitimately scary news that could have changed global fundamentals. Therefore, it is logical to assume that the bulls will try for a repeat performance.
Technically there is evidence this can happen again. In spite of the increase in headline risks, CLF stock has made higher-lows. The first scare from the St Louis Fed head Bullard comments marked the deepest drop. The Ukraine and this current level are still shallower than January.
Fundamentally, management reported a strong quarter last month. They guided forward with confidence that their pricing power and spreads will persist strong. So if nothing is wrong fundamentally and it is becoming technically cheap, then it’s a candidate to hold stock.
Nucor (NYSE:NUE) has the best all around profit and loss statement of these three steel stocks to buy. This includes having the largest revenue and an improvement growth rate. It is not the cheapest from a price-to-earnings basis, but the company earned this premium. Revenues doubled in five years and net income grew ten times.
Therefore, it is not a surprise to see its stock still soaring. Even after this dip, NUE stock is only down 36% from its all time high. I say “only” because the other two are both more than 80% down from theirs. Moreover, NUE stock is still roughly double late 2018 levels. This is important because that’s when the U.S. raised tariffs on China.
This week we learned that maybe this could start easing if Treasury Secretary Janet Yellen has her way. This relative out-performance from NUE could also be a mini curse. If the overall selling persists then it could have more to fall than the other two.
This post originally appeared at InvestorPlace.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.