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Steel Stocks Stumble

By Rich Smith – Updated Apr 5, 2017 at 8:56PM

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Whichever one you own, it's worth less today. But don't succumb to the scowl.

The past two days have been bad ones to be a steel investor.

Very bad days.

The commodities rout that cost certain steel stalwarts 20% of their market caps over the past few months resumed with a vengeance yesterday, as everyone from AK Steel (NYSE:AKS) to U.S. Steel (NYSE:X) melted down. U.S. Steel lost 10% on the day. AK wasn't far behind at 9%, followed in quick succession by Steel Dynamics (NASDAQ:STLD), Mittal (NYSE:MT), Nucor (NYSE:NUE), and Schnitzer -- suffering losses from 6% to 8%.

(The damage didn't end there. Other metals companies -- copper giants like Freeport-McMoRan (NYSE:FCX) and Rio Tinto (NYSE:RTP), for example -- suffered similarly steep declines.)

Why? (Oh, why?)
The reason for the sell-off (which has extended into Wednesday's trading), according to market worthies, comes down to this: The economy is slowing.

Gasp!
I know. Shocker. I cannot imagine why this surprised investors on Tuesday, but apparently people were awaiting confirmation from the Institute for Supply Management that its index of manufacturing activity is indeed reading "49.9." OK, that number means little without context. The context, therefore, is essentially this: Under 50 is bad. Over 50 is good. Therefore, 49.9 is bad.

But considering all the bad economic news that's been in the papers lo these many months, I find it hard to believe that the ISM number alone sparked Tuesday's sell-off. Analysts at Soleil Securities (a primo shop, according to our statistics at Motley Fool CAPS) agree. According to Soleil, factors such as an appreciating U.S. dollar are twisting the knife on domestic steelmakers. The more the dollar is worth, the more U.S.-milled steel costs to foreign buyers. And the more anything costs, the less of it a company (like, say, U.S. Steel, Nucor, et al.) can sell.

So you see their point.

Now here's my point
The dollar rises, and the dollar falls. So does ISM's arcane index. While the resulting pain to our portfolios hurts sorely, if you can live through it, you just might notice some bargains popping up in the steel sphere. Right now, U.S. Steel, Nucor, and Steel D all sell near a very reasonable PEG ratio of 1.0. More esoteric steel plays like Mittal, rumored takeover target AK, and steel scrapmeister Schnitzer sell for anywhere from 0.5 to 0.6 ratios.

Which suggests to me that, after Tuesday's and Wednesday's sell-offs, now just might be a very good time for steel investors who have a little money left in their wallets.

Fool contributor Rich Smith does not own shares of any company named above -- yet. (And pursuant to The Motley Fool's disclosure policy -- he cannot buy any of them for at least 10 days after this column is published.) Darn the luck.

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Stocks Mentioned

Steel Dynamics, Inc. Stock Quote
Steel Dynamics, Inc.
STLD
$70.19 (-3.27%) $-2.37
Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
FCX
$26.68 (-5.89%) $-1.67
Nucor Corporation Stock Quote
Nucor Corporation
NUE
$105.87 (-2.74%) $-2.98
United States Steel Corporation Stock Quote
United States Steel Corporation
X
$18.59 (-5.54%) $-1.09
AK Steel Holding Corporation Stock Quote
AK Steel Holding Corporation
AKS
ArcelorMittal Stock Quote
ArcelorMittal
MT
$20.33 (-4.60%) $0.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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