3 Reasons to Buy the Steel Stock Rally

by James Brumley | November 11, 2013 9:38 am

Given the average 27% gain for steel stocks since the middle of this year, it would be easy to be a little suspicious right now. After all, it’s widely known that the industry has been plagued for years by overcapacity and tepid steel prices. So what’s driving the long-dormant steel stocks up now?

Well, as it turns out, steel prices have been firming up for a while, and demand has finally (almost) caught up with production capacity.

In other words, the slump is over; the recent rally from the likes of U.S. Steel (X[1]) and AK Steel (AKS[2]) is unfurling for all the right reasons.

Better still, more of the same bullishness for steel stocks might be in store for 2014.

Steel Is for Real

It’s admittedly a more philosophical idea than some investors care to entertain, but “the market” is rarely wrong — if the steel industry’s stocks are on the mend, then we have to trust that enough investors know enough about the true condition of the steel market to justify stepping into them now after ignoring them for years.

It doesn’t hurt that Goldman Sachs recently upgraded the steel sector’s stocks[3], of course. AK Steel was newly deemed a “buy,” along with U.S. Steel and Steel Dynamics (STLD[4]). All of them are being boosted by the ongoing boom in the North American gas and oil industry, which in turn fuels the need for steel (tubes and pipes in particular).

Bluntly though, while Goldman’s optimism is encouraging, it’s also a bit of a Johnny-come-lately call, and it didn’t even acknowledge a handful of the other key clues suggesting the steel rally is for real. Those other clues, in no particular order:

Point being, if 2014 isn’t going to be a year of significant growth for steel producers, then a lot of people inside as well a outside of the industry are wrong in a huge way. That’s unlikely, though.

The plausible explanation for all these clues is just what it seems: Better days are around the corner, even if only as a self-fulfilling prophecy where demand rises to meet the highly accessible supply.

Bottom Line

While the rebound in steel stocks might have gotten a little ahead of itself over the past couple of weeks, any dip from names like AK Steel, Steel Dynamics or U.S. Steel is ultimately a buying opportunity.

Make no mistake, though — an investment in the major steel stocks here is an investment in a global economic rebound. A meaningful rebound here or abroad might feel out of reach. Just bear in mind, however, that Q3′s GDP growth rate for the United States was just reported (the first of three guesstimates anyway) at 2.8%, following Q2′s confirmed growth of 2.5%. China’s GDP growth for the third quarter, though still less than the red-hot growth rate from yesteryear, was still a solid 7.8%.

A trade in steel stocks might not be a bad bet here, even if it’s an unpopular idea. Indeed, steel may be a good bet specifically because it’s an unpopular premise.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. X: http://studio-5.financialcontent.com/investplace/quote?Symbol=X
  2. AKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=AKS
  3. Goldman Sachs recently upgraded the steel sector’s stocks: http://investorplace.com/2013/11/ak-steel-stock-upgrade-aks/
  4. STLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=STLD
  5. is as strong as it’s been in more than a year.: http://www.metalprices.com/p/steelbenchmarkerfreechart
  6. WLT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WLT
  7. are 11% higher than the third quarter’s average price: http://www.steelorbis.com/steel-news/latest-news/nwr-increases-coking-coal-prices-for-q4-789102.htm
  8. from a low of 806 to the current price of 1600: http://www.bloomberg.com/quote/BDIY:IND/chart

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