Steel These Stocks

03/29/2016 8:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

The global steel market is improving. After years of declines, the industry is expected to edge back into growth in 2016 and production is supposed to increase slightly after contracting 2.9% in 2015, observes Mike Cintolo, growth stock expert and editor of Cabot Top Ten Trader.

That takes pressure off US producers, including Steel Dynamics (STLD), which manufactures flat-roll, structural bar and rail steel out of Fort Wayne, Indiana. It also has a steel recycling business.

Although sales and earnings have declined for three straight quarters, the $0.09 a share it earned last quarter was more than triple consensus estimates.

It could be the start of a turnaround; analysts expect 67% EPS growth this year, and a mere 5% drop in sales, which is modest compared to last year’s 13% year-over-year drop-off. And next year, sales are expected to improve by 9%.

But the key is the global pickup in steel production and demand, which is lifting all steel producers’ boats on Wall Street.

After more than six months of steady decline, STLD found a bottom in January and is knocking on the door of 52-week highs.

Meanwhile, Reliance Steel (RS) — despite being a company with dwindling sales and earnings — is suddenly a big hit with investors.

Why? For starters, reported fourth-quarter earnings, though down 14% year over year, that managed to beat analysts’ estimates.

Also, the company is in the midst of erasing much of its debt; long-term debt declined 35% in the past 12 months.

But perhaps the biggest reason for investor enthusiasm is Reliance’s recent acquisition of Tubular Steel, a distributor and processor of stainless steel pipes, bars and tubes.

Tubular Steel has a stock of 60,000 tons and ships more than two million lengths of pipe, tubing and bar products per year.

A cheap multiple is one other feature that’s helping RS attract new investors: despite the declining earnings, the stock trades at just 13 times 2017 estimates, which could prove conservative if the steel sector turns up.

Subscribe to Cabot Top Ten Trader here…

By Mike Cintolo, Editor of Cabot Top Ten Trader.

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