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Steel Industry Investments

5 ways to Play the Hot Steel Pullback

Written by Brian Hicks
Posted July 17, 2008

Fannie, Freddie and the financials may have been mauled lately, but if there is one thing about the bear it's that he doesn't attack everyone equally.

Some sectors get savaged, while others merely only pullback. The key is knowing the difference.

Of course, it's those pullbacks that give investors the opportunity to take a nibble of their own. But to do so you have actually got to get in the cage with that nasty old bear.

That takes courage.

Savvy investors have it in spades. They head to the sounds of the guns, not away from them.

But today's markets present a different challenge of all their own—the guns are louder than they have been in 25 years. And with a greater recession looming, that bear may just be only warming up.

So you just can't jump into the cage and buy what you think is cheap. That's the "value trap" that has crushed the likes of Bill Miller-the famed Legg Mason guru.

He hit the trifecta of pain recently when he jumped into the cage basically covered in honey. Bad bets on the homebuilders, the financials, and more recently Freddie and Fannie themselves made Miller a tasty meal for the bears. Yummy.

So instead of concentrating on what looks "cheap" to guys like Miller, investors ought to be concentrating on the things that make stocks attractive in the first place.

That's growth, earnings, and more importantly these days—pricing power. That is how you get into the cage with the bear these days and live to tell about it.

That is what makes an "old economy" sector like steel industry investments attractive these days. They are one of the babies in the bath water.

Beating the Bear with Steel Industry Investments

Only dinged by the bear, steel is an industry that is still chugging along since demand remains high. And while auto sales and home construction are certainly down, that has only been something of a speed bump for steel. Energy, infrastructure, and agricultural uses for the product have more than filled the gap.

Then there is that old familiar story of world wide growth. It's gobbling up steel as fast as they can make it, scrap it or steal it. That is cutting into products that otherwise would be imported.

And it's not slowing down either, not by a long shot.

Demand from Brazil, Russia, India and China and other emerging economies will rise 6.7% this year to almost 1.3bn metric tonnes, according to the latest forecast by the International Iron and Steel Institute.

Moreover, growth in 2009 is set to rise by about 6.3%, according to the institute, which represents 180 steel makers across the world.

Increased pricing power is a result-even in the face of a downturn.

That not only has thieves stealing empty kegs and man hole covers but steel companies raising their prices and growing their margins.

In fact, steel prices have soared by almost 50 percent this year and could rise even higher as the cost of raw materials keeps goes higher and global demand increases. As a result, Goldman Sachs recently upped its steel price forecasts to $936 a ton this year. That same steel averaged $530 a ton at the end of last year

Moreover, the Goldman forecast puts the cost of steel for 2009 at $1000 a ton. Costs meanwhile are growing but going up less boosting margins.

On the flip side, a weaker dollar has also helped U.S. companies by raising the cost of imports. That has put American workers in a better competitive balance versus the rest of the world and protected domestic steel against "cheap imports".

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5 Ways to Play Hot Steel

That has steel stocks in general on the uptrend even in troubled times.

Here's a look at the 1 year chart of the Market Vector-Steel ETF (AMEX:SLX). It's an ETF tied to the worldwide steel industry and it is still on the rise.

steel industry investment chart
But as you can see, the recent sell off has pushed the fund all the way back down to its 200 day moving average (DMA). That is a place in the past where it has paid to tangle with the bear.

In fact, during the credit crisis inspired sell-off of last August the SLX went as low as $55 a share before rallying to an October high of $87. That was repeated again in January's swoon when it fell back to its 200 DMA at $70. From there, it went higher still to its most recent high of $114.

And in each case the stock has pulled back roughly 50% of the move as it fell back to its 200 DMA. The August move of $32 gave back $16, while the January move of $44 has given back $22 so far. That makes the SLX worth a look as it and the broader markets firm up.

Other steel names to watch on a pullback include: Commercial Metals Company (NYSE:CMC), Steel Dynamics Inc. (NASDAQ:STLD), and the big one United States Steel Corporation (NYSE:X) itself.

But no matter how you play it, steel stocks represent an "old economy" industry that can go higher-even in a downturn.

By the way, Nucor Corporation (NYSE:NUE) released their 2Q earnings this morning and they crushed it. Sales at the steel maker grew by 70 percent to $7.09 billion from $4.17 billion in the second quarter of 2007, while earnings increased by 68%. For the quarter the company earned $1.94 per share, up from $1.14 per share, in the same quarter a year before. Analysts had expected $1.78 per share.

That's another steel stock worth a serious look. But again only as it pulls back.

Your bargain-hunting-analyst,

steve sig

Steve Christ

The Wealth Advisory

Chief Investment Analyst

PS. Making money in a bear market is tough, but it can be done. Since the first of the year The Wealth Advisory is 11-5 in its closed positions with a cumulative gain of 290% vs losses of only 55%. That is a net gain of 235%.

To learn more about The Wealth Advisory click here.

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