Today’s News: Steel stocks are rising.
Steel stocks are surging today, most likely triggered by the unfortunate news of corruption at Kobe Steel. Here’s a commentary I wrote yesterday for Tim Lutts’ Cabot Stock of the Week advisory:
“Japanese steel and aluminum maker Kobe Steel announced on October 8 that it falsified data in products used by about 200 companies, putting into question the safety and reliability of cars, aircraft and space rockets. Affected companies include Boeing, Mitsubishi Heavy Industry and Toyota Motor. Kobe Steel stated that the deception might have been occurring for up to 10 years!
“A Japanese industry leader commented, “These are improper actions that could shake the foundation of fair trade.”
“News flash: the foundation of fair trade has been shaken for so long that it’s now supported by a wheelchair. The U.S. steel industry was already battered by a long list of egregious trade practices, including BAT taxes, VAT taxes, tariffs, currency manipulation, illegal dumping and cheating in the area of automobile rules of origin, which all serve to favor foreign steel producers and inhibit U.S. competition.
“Fortunately, the new U.S. Trade Representative Robert Lighthizer has extensive experience in international trade, and is well aware of the problems that lead to trade deficits and the solutions that can bring about balanced trade. Lighthizer landed in Washington D.C. and jumped into action. His office is in the process of renegotiating NAFTA and KORUS. In addition, unfair trade practices led to the Trump administration’s Section 232 investigation into the national security implications of steel imports.
“The political apple cart has been upset. You’re not likely to hear anything positive about the aforementioned negotiations and investigations from the mainstream media. But for American industry, it’s win-win. Any progress leading to more fair or balanced trade, no matter how small, will enhance American manufacturing. In fact, even the threat of such discussions can cause U.S. trade partners to scale back illegal dumping and other forms of trade cheating.
“There might be no U.S. industry that’s been more damaged by illegal dumping than the steel industry. But a turnaround is firmly in place! As typically happens when industries are emerging from downturns, the companies begin thriving financially long before share prices recover, creating incredible opportunities for investors who yearn for capital gains.”
The Cabot Undervalued Stocks Advisor portfolios currently hold two steel stocks: Commercial Metals (CMC, Buy) and Nucor (NUE, Strong Buy). I am expecting these stocks to retrace their recent highs from December 2016—CMC at 24 and NUE at 65—then to trade sideways and/or have pullbacks before they can gather enough steam to move higher.
When stocks experience big gains, as we’re seeing with steel stocks today, there’s usually a price pullback the next day. Therefore, if you’re interested in buying a steel stock, odds are good that you’ll get a better price tomorrow.
If you still own Schnitzer Steel (SCHN), which was recently sold from the Buy Low Opportunities Portfolio, here’s some helpful info as you decide whether to continue holding or sell. Schnitzer operates on an August fiscal year. When I sold SCHN, the 2018 EPS estimate reflected 11.6% growth. The current consensus estimate now reflects 37% EPS growth! That’s frankly an astonishing upward revision, although not necessarily unheard of among micro-cap stocks that have few analysts issuing research reports. In that light, the stock remains undervalued. Risk-tolerant stock investors might choose to keep their shares.
On the negative side, SCHN is pushing up against upside price resistance, and will have more trouble rising in the near-term than will CMC or NUE. If you own SCHN and you’re itching for short-term price action, you might want to sell SCHN and buy CMC or NUE. In addition, CMC and NUE hold less risk, in theory, because they are bigger companies with more analyst coverage.