Screening for Steel

05/06/2005 12:00 am EST


Marc Gerstein

Editor, Forbes Low-Priced Stock Report

Marc Gerstein oversees the Ideas & Screening section, which as its name implies, uses a variety of screening procedures to find the best stocks for differing investing strategies. Here, his system turns up a trio of steel makers.

"Metals and steel have been hot of late. While prudent investors should consider the prospect of reduced steel demand and/or higher raw material costs, in general a case can be made for staying in metals. But given near-term uncertainties, it seems best to companies that are better positioned to stand tall even if we get some near-term storms. In my opinion, firms with demonstrable abilities to outperform industry averages in key fundamental respects tend to fill the bill.

"Rio Tinto (RIO NYSE), a Brazilian company, is the most straight-forward play. It is the world's leading producer of iron ore. Accordingly, it benefits from anything that increases demand for steel. RIO also has some structural strengths. The ore on its properties tends to be good quality, a factor that moderates unit production costs and probably contributes heavily to its margin superiority. The company is increasing production capacity. And as an operator of railroads and ports linked to its mines, RIO is logistically integrated. The company is looking to diversify into other kinds of metals. But for now, the iron ore play predominates.

"Steel Dynamics (STLD NASDAQ) and Nucor (NUE NYSE) are mini-mill steel companies. Both face potential margin squeezes as scrap prices rise. Both are active in boosting use of alternative inputs. Also, both are non-union and very labor efficient. That provides one edge over traditional integrated steel mills. Another factor is the modern nature of their equipment. Choosing between NUE and STLD isn't easy. Nucor has been around for a long time and has a lengthy track record of success under a variety of economic conditions. That, coupled with still-powerful fundamental numbers, entitles it to a measure of respect. Nevertheless, analysts seem more partial to Steel Dynamics, likely due to near-term earnings trends.

"So which stock seems best? Try all of the above. If you're inclined toward a metallic investment play like this, consider splitting your funds among all three. You'll pay a bit more commission than you would with only one name. But with rates charged by modern e-brokers, that should not make or break your investment."

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