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Invest with some weight - Steel stocks

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March 10, 2008 – Comments (4)

I like a company that produces a tangible product, something that if you drop it on your foot, it hurts: rebar, structural pipe, flat rolled, tubular products, precision tube, stainless steel, tool steel, ingots, blooms, billets, bars, structural beams, etc...All these products could put a dent in your foot, but might also put some cash in your pocket.

Steel is basically iron ore with carbon used as a hardening agent. Other alloying agents are also used.  Steel is increadibly versitile,  depending on the elements added to the alloying process, one can control  hardness, tensile strength,  and ductility.

Steel stocks offer an extremely wide array of industries to invest in. The way I look at it, when you invest in a steel firm, you are not just investing in the steel industry, but the industry in which these firms steel products are sold to:

- Infrastructure construction
- Commercial construction
- Oil and gas distribution
- oil and gas exploration
- automotive
- applainces
- Aerospace
- aggraculture
- recylclers
- water projects
- international infrastrucute, construction
- raw material for steel, iron ore, zinc, manganese, tungsten, etc...

So there is no one demand for "steel". There is demand from the above many industries.  Being in cyclical industries, steel firms have had a bad reputation. This is unfounded in  my opoinion, as the steel industry appears to have learned its lessons from its cyclical past. Now steel companies understand paying down debt is a wise use of cash flow when times are good. Consolidation is also a ongoing dynamic in the steel industry that is likely to continue.

Another reason the love these steely investments - valuations. Most steel equities are trading below 12 times earnings. Cash flow from operations are also very strong, with an average cash flow yield of around 20% for the steel stocks I track.


Before investing in a steel company, investigate the industries that the steel firm sells into. My favorite steel industries are:

- Infrastructure construction
- Oil and gas distribution, exploration
- Aerospace
- recylclers
- water projects
- international infrastructure, construction

My current best steel investments:
                        
Ticker      PE       CF Yield      PE        Industries served
----------------------------------------------------------------------------------------------------------------------
PKX:       12            18%                   India, China infrastrucure, diversified
GGB       11            25%                   Latin america, US infrascture,
RS          10            15%                   US fabricator, aerospace
CMC       10             21%                  Recycler, US infrastruture, Europe
IIIN           9             18%                   Concrete, Infrastrucutre, bridges
USAP:      8             23%                   US power generation and aerospace



4 Comments – Post Your Own

#1) On March 10, 2008 at 5:02 PM, VTEngineer2001 (< 20) wrote:

Nice post. I too am bullish long-term on steel. With roadways and bridges undercapacity and degrading, they have to be replaced/rehabilitated. A couple others that are good are NUE and GNA (although NUE has run the past month). GNA bought Chaparral - a great steel company. Parent company Gerdau S.A. won't let this one fail. I have numerous posts regarding steel cos on my blog if you are interested. 

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#2) On March 10, 2008 at 5:05 PM, VTEngineer2001 (< 20) wrote:

One other point, iron ore is getting more expensive every month and so is steel tonnage. However, a few steel cos fabricate a good deal of their inventory from scrap metal - which is cheaper than raw iron ore. The result is increased margins. Two of these companies are STLD and NUE.

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#3) On March 10, 2008 at 5:15 PM, bellard (99.10) wrote:

Hi VTE;

CHAP was one of my favorite steels, along with IPS. Both were taken out at premiums, but I did not want to sell them. GGB is still strong, but it has run up a lot. I use to own NUE, I need to look into them again......

I like STLD, I have owned them on and off. I also like X because they own their iron ore, but I am always worried about legacy employee costs......

I will read your posts...... 

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#4) On March 10, 2008 at 5:16 PM, bellard (99.10) wrote:

Hi VTE;

CHAP was one of my favorite steels, along with IPS. Both were taken out at premiums, but I did not want to sell them. GGB is still strong, but it has run up a lot. I use to own NUE, I need to look into them again......

I like STLD, I have owned them on and off. I also like X because they own their iron ore, but I am always worried about legacy employee costs......

I will read your posts...... 

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