Back to top

Image: Bigstock

5 Red-Hot Steel Stocks Forged for Upside in the Second Half

Read MoreHide Full Article

The coronavirus pandemic has taken a heavy toll on most commodities this year on concerns of a demand slowdown and steel is no exception. In particular, the lethal respiratory virus has dealt a fresh blow to the U.S. steel industry, which bore the brunt of a sharp decline in domestic steel prices and damaging impacts of the U.S.-China tariff war in 2019.

However, with China (the top consumer of steel) seeing a rebound and economies across the world gradually opening up, things are looking up for the steel industry in the second half of the year.

The resumption of operations across major steel-consuming sectors such as automotive and construction augurs well for the steel industry. However, the road to recovery could be bumpy given the “second wave” of coronavirus infections.

China Recovery, End-Market Rebound Instill Optimism

China, which came out of the lockdown ahead of other countries, is gradually approaching normalcy. The world’s second-biggest economy is slowly clawing back from the coronavirus-induced slump.

China’s manufacturing sector, which reeled under the effects of the Sino-U.S. tariff war for most part of 2019, suffered another shock amid the pandemic. Manufacturing activities in the country dropped in the first quarter of 2020, impacted by shutdowns imposed by China authorities to stem the spread of the virus.

However, manufacturing activities have picked up over the past three months on a rebound in domestic demand and Beijing’s efforts to mitigate the impacts of the pandemic. China's official manufacturing purchasing managers’ index clocked at 50.9 in June, up from 50.6 in May. A reading above 50 indicates expansion in activity. Business activities in the construction sector also picked up pace in June.

Moreover, China’s automotive sector has also rebounded from the crisis brought by coronavirus. China’s passenger car sales are expected to rise 11% year over year in June, per China Association of Automobile Manufacturers. This would mark the third straight month of growth in vehicle sales. Government stimulus measures including tax rebates and attractive discounts from automakers have revived consumer demand.

Government stimulus is likely to continue to cushion China’s economy moving ahead. Beijing is looking to rev up the economy with big infrastructure spending and is also taking steps to boost domestic consumption. China has unveiled a roughly $500 billion stimulus focused on tax cuts, infrastructure projects and job creation to get the economy back on track.  

World Steel Association ("WSA"), the international trade body for the iron and steel industry, recently said that it expects steel demand in China to rise 1% in 2020. The WSA expects steel demand in China to be driven, in the second half of 2020, by the construction sector that has already attained full productivity. Construction is forecast to be supported by infrastructure investment driven by China’s new infrastructure push. The automotive industry is also expected to be backed by incentive measures.

As such, a recovery in construction and automotive sectors as well as manufacturing activities is expected to drive demand for steel in China in the second half. Shares of steel companies have also gained some traction of late partly due to a demand recovery in China.

Moreover, U.S. automakers began resuming production in May after a nearly two-month shutdown due to the virus crisis. The restart of production is likely to help resuscitate steel demand in this major market. Moreover, the resumption of many projects that were stalled earlier due to labor shortages and supply chain disruptions amid the pandemic is expected to support the revival in the U.S. construction sector.

The U.S manufacturing sector is also gaining momentum on a recovery in the overall economy as major parts of the country have reopened for business after coronavirus-induced shutdowns. According to the Institute for Supply Management, the U.S Purchasing Managers’ Index clocked 52.6% in June, rising from May’s reading of 43.1%. A figure above 50% indicates expansion. June saw growth in new orders, production and employment after declining in May. Notably, lockdowns and travel restrictions brought U.S. economic activities to a near-standstill in March and April. Despite the rebound in June, prospects are muddied by the recent resurgence of coronavirus cases across the nation.   

Meanwhile, U.S. steel prices have recovered somewhat from the lows witnessed in the first quarter due to demand slowdown amid automotive closures. U.S. steel mills’ price hike actions and higher scrap prices have helped the benchmark hot-rolled coil prices to gain some ground during the June quarter.

The Zacks Steel Producers industry also currently carries a Zacks Industry Rank #89, which places it at the top 35% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

5 Steel Stocks Worth a Wager

The steel industry is expected to benefit from improving market conditions, aided by a recovery in China and revival of demand across major end-use industries. As the industry's fundamentals are improving, it would be prudent to invest in steel stocks that have compelling prospects and are well placed to run higher in the second half.

We highlight the following five steel stocks, with a solid Zacks rank, that are worth considering for investment right now.

Commercial Metals Company (CMC - Free Report)

Headquartered in Irving, TX, Commercial Metals is a solid choice with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The company has expected earnings growth of 9.1% for the current fiscal year. The Zacks Consensus Estimate for the current fiscal has been revised 22.7% upward over the last 60 days. The company also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 38.9%. Its shares have also gained roughly 23% over the past three months.

Schnitzer Steel Industries, Inc.

Our next pick in the space is Portland, OR-based Schnitzer Steel sporting a Zacks Rank #1. It has delivered an average positive earnings surprise of 41.3% for the trailing four quarters. The Zacks Consensus Estimate for the current year also has been revised 135.7% upward over the last 60 days. The stock is also up roughly 23% over the past three months.

Companhia Siderurgica Nacional (SID - Free Report)

Brazil-based Companhia Siderurgica, carrying a Zacks Rank #1, beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters. The consensus EPS estimate for the current year has been revised 25.7% upward over the last 60 days. The stock is also up roughly 51% over the past three months.

Steel Dynamics, Inc. (STLD - Free Report)

Indiana-based Steel Dynamics carries a Zacks Rank #2 (Buy). The consensus EPS estimate for the current year has been revised 6.9% upward over the last 60 days. The company also has an expected long-term earnings per share growth rate of 12%. The stock is also up roughly 10% over the past three months.

Ternium S.A. (TX - Free Report)

Luxembourg-based Ternium carries a Zacks Rank #2. It beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, the average being 83.7%. The company also has an expected long-term earnings per share growth rate of 3.3%. The stock is also up roughly 19% over the past three months.

Zacks’ Single Best Pick to Double

From thousands of stocks, 5 Zacks experts each picked their favorite to gain +100% or more in months to come. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.

This young company’s gigantic growth was hidden by low-volume trading, then cut short by the coronavirus. But its digital products stand out in a region where the internet economy has tripled since 2015 and looks to triple again by 2025.
 
Its stock price is already starting to resume its upward arc. The sky’s the limit! And the earlier you get in, the greater your potential gain.

Click Here, See It Free >>

Published in