Steel is a highly cyclical industry, rising and falling along with the broader economy. But steelmaker maker Nucor (NUE -0.26%) has been surprisingly resilient in the face of that inherent volatility. If you are a conservative investor looking to add a steel stock to your portfolio, Nucor should be atop your list of options.
Having said that, you'll want to be careful about when you buy it. Here's a quick look at the company and whether or not Nucor's stock is a buy, sell, or hold today.
Nucor's business is big and diversified
The core of Nucor's steel business is electric arc mini-mills. As the name implies, these mills use electricity. But the real story is that mini-mills tend to be easier to ramp up and down along with the steel market. Thus the company's earnings tend to be less volatile than those of companies reliant on older blast furnace technology, which tends to be a feast-or-famine affair (big profits in the good years, deep losses in bad years). The inherent consistency in Nucor's business model is how it managed to become a Dividend King despite operating in a cyclical industry.
Another key feature of Nucor's operation is that it is vertically integrated. That's not uncommon in the steel sector, but it still provides extra stability. Essentially, the company has operations that help to ensure access to reasonably priced inputs (largely scrap steel for mini-mills) and customers. That last bit is important because Nucor uses a material amount of its own steel to produce higher-margin steel products (like steel racks and warehouse doors). So not only does it have a dedicated customer, but that customer helps Nucor turn commodity steel into more profitable items that boost its top and bottom lines.
Nucor also has a long history of being fiscally conservative. But it isn't afraid to invest capital for growth, often putting money to work when the industry is in a downturn so it comes out of the rough patch an even stronger company. And if all of that isn't enough, it treats its employees exceptionally well thanks to a profit-sharing model. There's a reason why the company is an industry giant with a $40 billion market cap.
Hold the stock, don't sell it
Nucor is a stock you buy and hold. You could try to trade in and out, given the cyclical nature of the steel industry, but that's bordering on market timing, and probably not worth the effort for most investors. It also assumes you can reliably predict which way the steel industry is going. Not the best plan when it comes to a company like Nucor that has, over the long term, produced such reliable business growth and dividend growth. If you simply held on and reinvested those dividends, you would have trounced the broader market, as the chart below shows.
NUE Total Return Level data by YCharts
In other words, if you bought Nucor, you should probably just stick around. What you'll want to focus on, however, is when to buy it.
Don't buy today, but keep it on your wish list
And therein lies the problem: Wall Street is well aware of Nucor's success and its attractive business model, and the stock does not go on sale very often. Right now shares are trading near all-time highs. The dividend yield is toward the lower end of the historical range. The stock does not look like a good buy at the moment.
And yet the steel industry is cyclical. If you own Nucor and want to get the full long-term benefit of its performance, you must have the fortitude to stick with the shares through the inevitable industry downturns. If you don't own Nucor, those downturns can provide you an opportunity to add it to your portfolio. You just need to keep an eye on it with a plan of action if the shares get cheap enough.
If you are looking for a buying point, you might want to consider a 3% dividend yield as a trigger. If the yield gets to 4%, Nucor is likely to be a screaming buy.
Prepare for the hardest time
What's interesting here is that buying Nucor when it has a 3% or higher yield will require you to invest at what will likely be the scariest of times for the business. If you own Nucor, it will be hard to hold through periods like that too, meaning right when you might want to be adding to your position you could be thinking about running for the hills (and selling). That's why planning ahead of time is so important with this industry-leading, but still cyclical, steel stock. Buy at the right time and hold, ostensibly, forever.
