Steel Stocks: An Easy Way to Profit From Their Recovery

Patient steel-stock investors can collect some dividends while they wait.

Mar 25, 2014 at 5:15PM

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some steel stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Market Vectors Steel ETF (NYSEMKT:SLX) could save you a lot of trouble. Instead of trying to figure out which stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on steel stocks, sports a relatively low expense ratio -- an annual fee -- of 0.55%. The fund, which recently yielded 2.2%, is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This steel-stocks ETF has underperformed the world market over the past three and five years. It's the future that matters most, though, and as with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why steel stocks?
As the global economic recovery gains traction, demand should grow for materials used in construction, manufacturing, and infrastructure projects. Thus, steel stocks stand to benefit.

Some steel stocks had strong performances over the past year. AK Steel Holding Corporation (NYSE:AKS), for example, soared 111%, getting a boost recently on news of a price increase for hot-rolled coil from the world's largest steel company, ArcelorMittal. News that it's extending its $1.1 billion credit facility's maturity by three years also helped. Bears don't like its heavy unionization and pension obligations, among other things, and the stock is rather heavily shorted. Bulls are hopeful that a healthier auto market will fuel more steel demand. The auto industry has generated about half of AK Steel's revenue.

Other steel stocks didn't do quite as well over the last year, but could see their fortunes change in the coming years. Cliffs Natural Resources (NYSE:CLF) sank 3%, struggling with an oversupplied iron ore market and its own relatively high costs. (It also produces metallurgical coal, used in steelmaking.) Another strike against Cliffs is its vulnerability to weakness in China, and the Casablanca Capital hedge fund is waging a proxy battle to split the company in two. Its fourth quarter featured a solid return to profitability, rising free cash flow, and falling debt. Cliffs does sport a 3% dividend yield, but it's not a stranger to dividend cuts.

Brazil-based Gerdau S.A. (NYSE:GGB) shed 15%, and recently yielded 1.8%. It has been performing well despite a soft Brazilian economy and making investments to boost its competitiveness. Its fourth-quarter earnings surged 244% over year-ago levels, and 2013 earnings advanced 13% over those of 2012. Cash flow from operations slipped 6% in 2013, though. Following the report, management forecast growing global economic activity, leading to rising steel demand.

Brazilian mining giant VALE S.A. (NYSE:VALE) dropped 20% and yields just 0.9%. It has been cutting costs aggressively, reducing its investments, and selling assets. Its performance has been boosted by its having lower costs than some of its peers. Still, slowing growth in China and low iron ore prices have been concerns. Analyst Carlos De Alba at Morgan Stanley upgraded Vale's stock in February from equal-weight to overweight, seeing its risk-reward trade-off as attractive and the company as poised to increase profit margins.

The big picture
If you're interested in adding some steel stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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