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Commercial Metals Gets Hammered

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 1:00PM

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Missing estimates meant a big market markdown for this diversified metal company.

Beware of stocks in once-popular industries. The momentum crowd, once its mood switches from sweet to sour, can be brutal toward any company perceived to disappoint. Such was the case for Commercial Metals (NYSE:CMC) on Tuesday. Even though the company posted earnings within the lower end of its range of guidance, it missed the analysts' consensa-guess, and the market took an iron bar to the stock as a result.

Commercial Metals, all told, actually had a pretty respectable quarter, despite sharply falling scrap prices, poor performance in Poland, and a rather chaotic steel market. Sales for fiscal Q3 rose by nearly 23%, while operating income jumped 40%, and net income climbed about 41%.

Not that the Street is really noticing today, but Commercial Metals is actually in some pretty good markets. Nonferrous metals are doing better than ferrous metals right now, and Commercial Metals has a good little niche there.

What's more, for all of the angst about steel, those reciting the sturm und drang aren't going out of their way to point out that the steel market is lumpy. Flat-rolled steel has been really weak, but a lot of the more specialty-oriented steel has held up relatively better. Credit China, which is producing more rolled steel than the world market can readily absorb but doesn't make nearly as much of the specialty-steel types.

There are other reasons for optimism about Commercial Metals. The highway and bridge markets -- major markets for the company -- haven't really kicked in yet, thanks to the absence of a transportation bill. What's more, the scrap and recycling business seems to have at least momentarily bottomed out, though I'd caution investors that those are some famous last words.

For better or worse, Commercial Metals is going to trade roughly in parallel with investor enthusiasm over basic materials in general and steel in particular. After all, plenty of market studies have shown that individual stock moves can be explained largely by underlying industry moves.

So although I like this company and its management team, it's going to take some intestinal fortitude to buy shares like these right now. Given that I generally like to buy cyclicals only when nobody talks about them and they're years removed from the last upswing, I think I'll be standing on the sidelines for now, though continuing to root for the team.

Here are more takes for those looking for a steely gaze:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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CMC
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