President Trump, in his first address to a joint session of Congress on Tuesday, reaffirmed his plans to pump $1 trillion of new infrastructure spending into the U.S. economy, aimed at fixing America’s “crumbling” infrastructure.
The president said that he will ask the Congress to pass a bill that would produce a $1 trillion investment in the national infrastructure to rebuild roads, bridges and other public infrastructure, and create millions of new jobs. This effort will be guided by two key principles – “Buy American” and “Hire American,” he noted.
“America has spent approximately $6 trillion in the Middle East, all this while our infrastructure at home is crumbling. With this $6 trillion we could have rebuilt our country – twice,” Trump added.
The president’s call for the colossal infrastructure spending – one of his key campaign promises – is a welcome news for American steel makers as it is likely to have a beneficial effect on the U.S. steel industry given the expected increase in steel consumption.
Steel Stocks on a Tear
Positive reactions to Trump’s speech triggered a rally in major U.S. steel stocks on Wednesday with United States Steel Corporation (X), Nucor Corporation (NUE) and AK Steel Holding Corporation (AKS) gaining 2.5%, 2.3% and 4.9%, respectively.
Steel stocks, which had been in the dumps for most part of 2016, got a big thrust following Trump’s election win in November.
Shares of U.S. Steel catapulted nearly 90% since Trump’s victory while Nucor and AK Steel gained around 25% and 45%, respectively. Expectations of increased infrastructure-related spending in the U.S. has pushed steel stocks to new highs.
Steel Sector on the Mend
The steel sector is coming back to life after remaining in limbo for long. Steel market conditions in the U.S. have been recovering lately, driven by favorable developments on steel trade cases in the recent past. Steel imports were down around 15% year over year in 2016. Moreover, steel prices have rebounded partly on the back of punitive trade actions that led to levy of tariffs on imports.
U.S. regulators, in mid-2016, imposed a whopping final anti-dumping duty rate of 209.97% on imports of corrosion-resistant steel from China and also levied a hefty final anti-dumping duty rate of 265.79% on Chinese cold-rolled steel. U.S. steel producers continue to actively press the U.S. regulators to stop unfair trade practices and ensure a fairer and more competitive market for American steel makers and workers.
The domestic steel industry is expected to get more protection under the Trump presidency. Trump, during his presidential campaign, repeatedly threatened to impose a 45% tariff on Chinese imports into the U.S.
Continued momentum in the automotive space and a recovery across housing and commercial construction markets have been other key tailwinds for the steel industry. While continued weakness in investment globally is hindering a stronger steel demand recovery, a better-than-expected forecast for China along with continued growth in emerging economies are expected to help the global steel industry resume a positive growth path in 2017.
The Zacks categorized ‘Steel-Producers’ industry has also outperformed the broader market over the past year. The industry has gained around 66.5% over this period, much higher than S&P 500’s corresponding return of 18.2%.
Attractive Valuations Abound
Going by the EV/EBITDA multiple, a preferred valuation metric for cyclical industries like steel, the steel industry appears attractive at this point.
The industry has a trailing 12-month EV/EBITDA multiple of 8.81, which compares favorably to the S&P 500 EV/EBITDA multiple of 10.62. The industry’s lower-than-market positioning calls for some more upside moving ahead.
3 Steel Stocks to Reinforce Your Portfolio
Trump’s infrastructure spending promises have painted a bullish picture for American steel makers. Amid this backdrop, it would be a prudent idea to invest in steel stocks that have compelling prospects and might offer solid investment returns.
We highlight the following stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now. You can see the complete list of today’s Zacks #1 Rank stocks here.
United States Steel Corporation (X)
Headquartered in Pittsburgh, PA, United States Steel Corporation (X) sports a Zacks Rank #1 and has delivered a positive earnings surprise of a whopping 2,600% in the last reported quarter. The stock has returned 221.4% over the past year, outperforming the Steel-Producers industry’s gain of 64.2% over the same period.
X stock has a long-term expected earnings per share (EPS) growth rate of roughly 8%.
Steel Dynamics, Inc. (STLD)
Indiana-based Steel Dynamics, Inc. (STLD) carries a Zacks Rank #1 and has a long-term expected EPS growth rate of roughly 12%. The stock has gained 87.2% over the last one year, outperforming the Steel-Producers industry, which has gained 64.2% over the same period.
The company has an expected earnings growth of 33.3% for the current year.
Olympic Steel, Inc. (ZEUS)
Ohio-based Olympic Steel, Inc. (ZEUS) is another attractive choice with a Zacks Rank #2. The company has an expected earnings growth of 87.5% for the current year. Its earnings estimate for 2017 has improved by 11% over the last 30 days. Olympic Steel has gained 96% over the last one year, outperforming the Steel-Producers industry’s gain 64.2% over the same period.
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