Please ensure Javascript is enabled for purposes of website accessibility

Why Steel Dynamics is a Tempting Turnaround Play

By Brian D. Pacampara, CFA – Feb 5, 2014 at 12:06PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Does this analyst make a good case? Or is it just more noise from Wall Street?

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 (STLD 1.43%) 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. 

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Steel Dynamics Stock Quote
Steel Dynamics
$108.27 (1.43%) $1.53

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

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.