Why Steel Dynamics is a Tempting Turnaround Play

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Steel Dynamics  (NASDAQ: STLD  ) gained about 1% this morning after Jefferies upgraded the steel products company from hold to buy.

So what: Along with the upgrade, analyst Luke Folta planted a price target of $18 on the stock, representing about 13% worth of upside to yesterday's close. While momentum traders might be turned off by the stock's sharp decline over the past month, Folta thinks Steel Dynamics is now too cheap to pass up given its strong free cash flow generation and low-cost competitive edge.

Now what: According to Jefferies, Steel Dynamics' risk/reward trade-off is pretty attractive at this point. "The recent -18% pullback in STLD's valuations offers investors an attractive entry point into one of the more favorable stories in N.A. steel," noted Folta. "STLD's operations are low cost & diversified, generate consistently strong FCF (supports healthy dividend) and have high leverage to the impending recovery in U.S. non-res." When you couple those qualities with Steel Dynamics' cheapish forward P/E of 10, it's tough to disagree with Jefferies' upgrade. 

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