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This 'Strong Buy' Steel Stock Enters Powerful Uptrend

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While many commodity stocks have pulled back off the highs from last year, the bullish run for steel stocks remains well intact. In fact, as we’ll see, this group has recently broken out and is one of the areas leading the way in 2023.

Some investors may feel conservative about investing in a stock that is trading near a 52-week high. Rather than viewing the price level as concerning, history has shown us that a stock hitting new 52-week highs is a telling sign of strength. Only the strongest stocks that are in the most powerful uptrends print fresh yearly highs, and many steel stocks are displaying that exact behavior at this very moment.

History has also illustrated countless times that stock trends tend to last longer than many investors realize – particularly strong uptrends breaking out to new highs. The VanEck Vectors Steel ETF (SLX - Free Report) has not only outperformed over the course of the past year, it is also showing relative strength in 2023, climbing more than 17%.

The old market adage comes to mind – follow the trend until the end when it bends. There’s no sign that the uptrend in the VanEck Vectors Steel ETF is bending. SLX seeks to replicate the performance of the NYSE Arca Steel Index, which is intended to track the overall performance of the companies involved in the steel sector. SLX has more than quadrupled in value from the March 2020 bottom.

The Zacks Metal Products – Distribution industry group has outpaced the market this year with a nearly 18% return and is currently ranked in the top 13% out of approximately 250 industries. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform over the next 3 to 6 months.

Zacks Investment Research
Image Source: Zacks Investment Research

Quantitative research studies have shown that approximately half of a stock’s future price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. Despite the impressive move, this group remain relatively undervalued:

Zacks Investment Research
Image Source: Zacks Investment Research

This highly-rated industry also contains a top-ranked stock we will analyze below. Let’s take a more in-depth look at this Zacks Rank #1 (Strong Buy) stock that constitutes nearly 5% of the total SLX ETF holdings.

Reliance Steel & Aluminum Co. (RS - Free Report)

Reliance Steel & Aluminum is one of the largest metals service center companies in the United States. RS provides aluminum, alloy, brass, copper, steel, and titanium products to general manufacturing, non-residential construction, transportation, energy, and defense industries. The company operates over 200 metal processing and distribution facilities in 40 states, as well as 13 in other countries.

RS, a Zacks Rank #1 (Strong Buy) stock, continues to grow through strategic acquisitions and the expansion of existing operations. The company has made 59 acquisitions since its IPO back in 1994. The purchase of Metals USA added about 48 service centers located throughout the U.S., while the buyout of Tubular Steel boosted the firm’s product portfolio and end market diversification. Higher metals prices are expected to drive RS’s performance this year.

RS has strung together an enviable history of earnings surprises, surpassing earnings estimates in each of the last fifteen quarters. The company most recently reported Q3 earnings back in October of $6.48/share, a 4.52% surprise over the $6.20 consensus estimate. Reliance Steel & Aluminum has delivered a trailing four-quarter average earnings surprise of 13.64%.

RS stock has returned investors north of 53% in the past year. Trading at just a 12.91 forward P/E, shares remain relatively undervalued.

Zacks Investment Research
Image Source: Zacks Investment Research

Analysts covering RS have upped their 2023 EPS estimates by 7.41% over the past 60 days. The Zacks Consensus Estimate now stands at $18.26/share.

Zacks Investment Research
Image Source: Zacks Investment Research

What the Zacks Model Unveils

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently witnessed positive earnings estimate revision activity. This technique has proven quite useful for finding earnings surprises – in fact, when combining a Zacks Rank #3 or better and a positive earnings ESP, stocks have produced a positive surprise 70% of the time.

RS is currently showing a positive ESP of 0.11%. Combined with a Zacks Rank #1 (Strong Buy) ranking, another earnings beat may be in the cards when RS reports fourth-quarter results next week on February 16th.

Keep an eye on RS as well as its industry group as the outperformance looks set to continue.

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