7 Reasons to Consider Some Small-Cap Scrap

Some people see a mountain of discarded cars and appliances and call it crap, but Fools know there's profit hiding in a heap of scrap.

The global boom in demand for steel has been a defining chapter in the broader bull market in commodities, leading steelmakers like POSCO (NYSE: PKX  ) and Arcelor Mittal (NYSE: MT  ) to some stainless profits of their own. Meanwhile, a small-cap scrapper called Metalico (AMEX: MEA  ) has emerged as a favorite related play among the talented investors at Motley Fool CAPS.

Since the shares carved an intriguing bounce from some near-term lows last week, I thought I'd take a closer look and present seven reasons why I think this scrapper could be an ironclad growth stock for Fools to consider.

  1. The global commodities boom is alive and well, even though a rally in the U.S. dollar and curbs on industrial activity around Beijing during the games have contributed to a monster correction in many commodity stocks.
  2. Metalico delivered blowout earnings last month, with both sales and EBITDA rising by more than 300% over the 2007 quarter. Although weaker pricing for platinum and non-ferrous metals may slow the pace of earnings growth in the near-term, I expect the strength of steel and iron pricing to continue.  
  3. Get the lead out. Metalico is the largest fabricator of lead products in the U.S.
  4. Metalico is seriously green. In addition to reducing landfill waste and reducing energy consumption for steelmakers, Metalico invests in wind energy projects and runs its fleet of trucks on biodiesel and diesel fuel.
  5. Growth through acquisitions is Metalico's guiding mantra in an industry ripe for rapid consolidation. Far smaller than rivals Sims Group (NYSE: SMS  ) and Commercial Metals (NYSE: CMC  ) , Metalico has ample room to grow.
  6. Metalico shares are off by 30% since its high in June. As bad as that sounds, scrappy steelmakers Nucor (NYSE: NUE  ) and Schnitzer Steel (Nasdaq: SCHN  ) are down by 37% and 40%, respectively, from their June highs.
  7. 1,031 CAPS members, including 218 All-Stars, rate Metalico an outperform even after the recent sell-off. In my experience, that level of CAPS interest is the best reason of all to give Metalico a closer look.

To find out what members like cawdad and others are saying about Metalico, join the Motley Fool CAPS community. It's free and fun!

Further Foolishness:

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Metalico. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 15, 2008, at 12:02 PM, XMFSinchiruna wrote:

    An update from the company on the recent stock slide:

    http://biz.yahoo.com/iw/080915/0433794.html

    The Company believes losses from unhedged metals and the impact of lower commodity selling prices will likely reduce EBITDA by approximately $10,000,000 in the Third Quarter but nonetheless the Company should report a profit for the period. This negative impact resulted from aggressive (long lead-time) purchase commitments for unhedged Platinum Group Metals, a practice that has been discontinued.

    Metalico has implemented procedures to correct the conditions that contributed to the loss and is now hedged on nearly 100% of its Platinum Group Metals exposure.

    The Company has explained repeatedly in its quarterly results calls that it does not offer guidance or earning estimates because the scrap recycling industry is highly cyclical and commodity metal markets can be and often are volatile. Recent movements in the commodity metal markets have confirmed this position.

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