The direction of cyclical stocks can be hard to predict, even when one knows the status of the underlying business. Other macroeconomic factors can drive stock prices, especially in commodity-oriented businesses. Investors in these types of companies try to look ahead, and many use them as trading vehicles, trying to beat the crowd in and out of the stocks. 

But a confluence of events related to the pandemic and the ongoing global economic recovery from its effects has domestic steelmakers predicting record profits ahead. These first-quarter 2021 earnings announcements start next week.

Whether investors are seeking an entry point for a long-term holding, or a trading position within a portfolio, now is a good time to look at how upcoming earnings from domestic producers Nucor (NYSE:NUE), Steel Dynamics (NASDAQ:STLD), Cleveland-Cliffs (NYSE:CLF), and U.S. Steel (NYSE:X) may affect stock prices.

Steel gears labeled Delivery, Quality, Service, and Price

Image source: Getty Images.

Guidance updates

An early clue for what to expect came in early February, when leading steelmaker Nucor issued a special news release well ahead of when it normally issues any quantified earnings guidance. Specifically, the company said in a statement: "Nucor has elected to provide this update due to what it sees as an unusually large gap between its internal forecast and the current mean estimate for its first quarter earnings."

At that time, the company said it expects record quarterly net earnings of more than $900 million. For perspective, that single quarter compares to full-year 2020 earnings of $721.5 million, and 2018's record full year of $2.36 billion.

Beginning in mid-March, other domestic steelmakers began issuing guidance for first-quarter earnings, too. Steel Dynamics (SDI) also said it could see a record first quarter, Cleveland-Cliffs surprised analysts with its adjusted EBITDA forecast, and U.S. Steel provided strong guidance excluding effects related to its recent acquisition of Big River Steel. Nucor also reiterated its previous note, adding that it believes the second quarter could result in yet another quarterly record. 

What's driving the surge

Strong demand is currently supporting product pricing, particularly in the steel sheet business. The companies are seeing particularly strong automotive and construction markets, but Nucor also said it is benefiting from renewable energy expansion, heavy equipment, and agriculture. Some of that is due to a rebound after pandemic-related production suspensions in several industries drew down inventory levels. There is also pent-up consumer demand for housing, appliances, and cars.

Additionally, global trading logistics has been affected by the pandemic, with ports backed up and shortages of sea containers. The supply and demand imbalance is also keeping global steel from entering the U.S. in significant enough volumes to affect pricing. The result is domestic hot-rolled steel (CRU) price levels that are significantly higher than in recent years. 

Metric 2021 2020 2018 2016


April CRU Price ($/Ton) 1350 515 858 477 653

Data source: Quandl Nasdaq Platform.

How things look from here

There has also been consolidation in the domestic industry in recent years. Cleveland-Cliffs acquired AK Steel, and the North American assets of global steelmaker Arcelor Mittal (NYSE:AM). U.S. Steel also recently completed its purchase of Big River Steel. 

Those purchases drove up debt for the acquiring companies, but recent cash flow has helped bring that more under control. 

NUE Financial Debt to Equity (Quarterly) Chart

NUE Financial Debt to Equity (Quarterly) data by YCharts

Still, investors should stick with the lowest-cost producers -- Nucor and SDI. Both companies have already indicated that orders remain robust, and future visibility allows them to predict that second-quarter earnings will exceed the first quarter. If those predictions hold, both steelmakers will be at, or near, full-year record income levels only halfway through 2021. 

Even if investors assume results from the second part of 2021 will be cut in half, both Nucor and SDI are trading at forward price-to-earnings ratios near the single digits. For longer-term investors, both companies have been investing billions in recent years for profitable growth in various areas. An additional potential catalyst from increased infrastructure spending is also a possibility.

While some investors and traders may pull out of these cyclical stocks prior to peak earnings, we aren't there yet. Current valuations leave room for further upside in the near term. And depending on the outlook for the balance of the year, that upside could still be meaningful. Investors should look to second half 2021 guidance to see how much longer shares can keep moving up.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.