At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best...
In this column, I usually speak of "the best" in a general, forgiving sense -- the same sense, I suspect, that convinces the Wall Street bankers that they are indeed better stock pickers than the rest of us are (despite all evidence to the contrary). Every once in a while, though, one of the firms that truly deserves the title "Wall Street's Best" comes along and publishes a stock recommendation.
That happened this week, when Soleil Securities upgraded shares of steelmaker Nucor (NYSE: NUE ) from "hold" to "buy" on Wednesday. According to Soleil, fears that a global recession will cause a meltdown in the prices of commodities have Nucor shares selling for as much as 50% less than the analyst thinks they're worth.
And Soleil has a point -- at least about the meltdown thing. As I described earlier this month, metals companies like copper giants Freeport-McMoRan (NYSE: FCX ) and Rio Tinto (NYSE: RTP ) , and steelmakers like Nucor and U.S. Steel (NYSE: X ) , have seen their shares chopped by 20% and more over the past few weeks -- as the price of steel scrap plunged by $300 per gross ton. But this sell-off has planted the seed for a new bull market among the metals-makers.
As Soleil points out, "the enterprise value of Nucor company is trading at less than four times 2009 estimates of EBITDA ... [which is] not the lowest in the industry, but nearly the lowest."
Which begs the question...
So who is the lowest? Let's run over the stats real quick, reviewing both the EV/EBITDA calculation that caught Soleil's attention -- as well as the more traditional P/E ratio that you may be more familiar with:
|
Company
|
EV/EBITDA
|
P/E
|
CAPS Says (out of 5):
|
|
Nucor
|
3.9
|
7.5
|
*****
|
|
AK Steel (NYSE: AKS )
|
4.4
|
8.6
|
***
|
|
Steel Dynamics (Nasdaq: STLD )
|
5.4
|
7.6
|
****
|
|
Schnitzer Steel (Nasdaq: SCHN )
|
5.6
|
9.9
|
****
|
|
U.S. Steel
|
6.1
|
9.8
|
***
|
Source: Yahoo! Finance as of Sept. 10.
Hmm ...
As it turns out, then, Nucor is the lowest-priced stock in the steel industry -- at least among name-brand firms, and at least from the EV/EBITDA perspective that Soleil prefers. It's also the most highly ranked U.S.-based steelmaker in the estimation of CAPS members.
Take these two facts, and toss in the facts that Soleil Securities ranks 16th out of the 169 professional stock pickers whom we track on CAPS, that it ranks in the top 2% of investors overall, and that it calls about 59% of its picks right -- and I think it's a safe bet that Nucor will indeed outperform the market going forward.
Foolish takeaway
While I respect Soleil's opinion on Nucor, though, and agree that the pick will probably "work out" for the analyst, I think Soleil's gone a step too far in declaring Nucor the best of the bunch.
Why? Well, first of all, let me make it clear: I think the whole dang steel industry has been sold off for no good reason. You can't throw a steel ingot on Wall Street without hitting an underpriced metalsworker anymore.
That said, based on the consensus of all analysts surveyed, Nucor may be the "cheapest" stock in this industry for a reason. That reason being that it's also expected to be the slowest grower of the bunch, setting a 7% pace for profits growth over the next five years. To my Foolish eye, Steel Dynamics looks slightly cheaper than Nucor from a PEG perspective -- and AK, Schnitzer, and U.S. Steel are all downright dirt cheap. I'd suggest investors give these companies a good hard look first, before backing up the truck on Nucor.
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