5 Solid Steel Stocks to Reinforce Your Portfolio in 2021
The year 2020 kicked off on a positive note with stock markets continuing the upward momentum witnessed in 2019. Then came coronavirus and ended the joie de vivre.
Coronavirus, which was first detected in China, brought business activities to a shuddering halt for three months due to lockdowns and restrictions by governments across the world. The virus crisis triggered bruising sell-offs across global markets from February till mid-March on concerns over fallouts of the contagion on the world economy.
The pandemic also put most commodities on slippery ground this year and steel is no exception. A slowdown in demand across major end-use industries put a dent on the steel industry for much of the first half. In particular, the pandemic dealt a fresh blow to the U.S. steel industry, which reeled under the effects of a sharp decline in domestic steel prices and the U.S.-China tariff war last year.
Nevertheless, the steel industry has pulled off a comeback, buoyed by a revival in demand and an upswing in steel prices. Steel demand has picked up with the resumption of operations across major steel-consuming sectors following easing of lockdowns and restrictions across the word. Moreover, steel prices have gained strength on an upturn in demand.
Demand Upturn, Zooming Steel Prices Set the Stage for Upside Next Year
The rebound across major end-use industries such as construction and automotive represents a tailwind for the steel industry. Recovery in the automotive industry has accelerated following pandemic-led shutdowns on the back of strong customer demand. The automotive rebound is driving demand for flat steel products globally. Steel makers are seeing strong order booking in automotive.
The construction sector has also bounced back on the heels of a resumption of projects that were stalled earlier due to supply chain disruptions and manpower shortage. In particular, the non-residential construction market remains resilient. The revival in the construction sector globally is driving demand for long and flat steel products in this major market. Notably, automotive and construction together account for a big chunk of steel consumption.
Meanwhile, a recovery in construction and manufacturing activities is driving demand for steel in China, the world’s top consumer of the commodity. Steel demand is being driven by government spending in infrastructure projects. Beijing is looking to rev up the economy with big infrastructure spending and is also taking steps to boost domestic consumption. Government stimulus measures will likely further boost China’s steel demand, especially in property and infrastructure sectors. A rebound in China’s demand augurs well for steel companies.
China, which came out of the lockdown ahead of other countries, has clawed its way back from the pandemic-triggered slump, aided by government stimulus. Notably, China’s manufacturing activities have gained strength after slumping in the first three months of 2020 on a rebound in domestic demand and government’s efforts to mitigate the impacts of the pandemic.
The country’s automotive sector is also recuperating from the crisis wrought by coronavirus. China government’s incentives including tax rebates and attractive discounts from automakers and dealers have revived consumer demand.
Moreover, steel prices are on an upswing on the back of rising demand, supply shortages and higher raw material costs. Notably, U.S. steel prices have staged a strong recovery and hit record levels after cratering to pandemic-induced multi-year lows in August. The benchmark hot-rolled coil (“HRC”) prices started to recover in September and are screaming higher since then. Prices zoomed past $900 per short ton earlier this month on U.S. steel mills’ price hike actions, tight supply and rising demand, and recently touched the $1,000 per short ton level.
The demand-supply imbalance is the prime reason behind the spike in steel prices. Lead times for steel delivery at U.S. steel mills remain extended, indicating healthier demand. Meanwhile, supply remains restricted due to production disruptions and mill outages. Steel scrap prices are also on the rise amid tight supply. Improved demand, elevated raw material costs and supply constraints are likely to continue lending support to HRC prices moving into 2021. Higher prices bode well for the profitability of steel companies.
5 Top Picks for 2021
The steel industry is expected to benefit from improved market conditions, aided by a recovery in China, revival of demand across major end-use industries and surging prices. Here we pick five steel stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) that hold prospects to fare well in 2021 leveraging improving market fundamentals. Our research shows that stocks with a Zacks Rank #1 or 2 offer the best investment options.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Schnitzer Steel Industries, Inc. SCHN: Oregon-based Schnitzer, sporting a Zacks Rank #1, is a leading manufacturer of recycled metal products in North America. Its steel manufacturing operations produce finished steel products. Its productivity improvements and cost reduction actions along with continued commercial initiatives are lending support to margins. The company should also benefit from improvement in ferrous and nonferrous markets, its debt reductions actions and transition to its new One Schnitzer operating model which increases its efficiency.
The company has expected earnings growth of 337.2% for fiscal 2021. It also delivered an earnings surprise of 61.1%, on average, over the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2021 also has been revised 52.8% upward over the last 60 days. Moreover, the company has seen its shares rally roughly 39% year to date.
Ternium S.A. TX: Luxembourg-based Ternium, sporting a Zacks Rank #1, is a leading producer of flat and long steel products. The company’s actions to optimize production and overhead cost as well as cut general expenses are expected to aid to its margins. It is also benefiting from the cost competitiveness of its facilities. The company is also taking actions to boost liquidity and strengthen its financial position in the wake of the pandemic.
Ternium has expected earnings growth of 204.3% for 2021. It also beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 178.5%. The consensus estimate for the next year also has been revised 143.9% upward over the last 60 days. The company’s shares have also popped roughly 32% this year.
POSCO PKX: South Korea-based POSCO, carrying a Zacks Rank #2, manufactures and markets a wide range of steel products including hot rolled sheets, plate, wire rod, cold rolled sheets, galvanized sheets and stainless steel globally. The company should benefit from a recovery in sales volumes and production from the pandemic-led slowdown, higher sales prices and a rebound in demand in the automotive sector. It should also gain from cash flow management and cost-cutting initiatives. Moreover, a recovery in industrial production is expected to support its sales and margins.
POSCO has expected earnings growth of 104.3% for 2021. The Zacks Consensus Estimate for 2021 has been revised 6.9% upward over the last 60 days. The company also has an estimated long-term earnings growth rate of 5%. The stock is also up around 22% year to date.
Olympic Steel, Inc. ZEUS: Ohio-based Olympic Steel is a leading metal service center focused on the direct sale and distribution of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel and aluminum products. The company, carrying a Zacks Rank #2, is benefiting from its strong liquidity position, its actions to lower operating expenses and strength in its pipe and tube and specialty metals businesses. Moreover, improving industrial market conditions and a rebound in demand are expected to support its volumes.
Olympic Steel has expected earnings growth of 433.3% for 2021. The Zacks Consensus Estimate for the next year has been revised 77.4% upward over the last 60 days.
Nucor Corporation NUE: Charlotte, NC-based Nucor, carrying a Zacks Rank #2, makes steel and steel products with operating facilities in the United States, Canada and Mexico. The company is expected to benefit from the strength in the non-residential construction market. Nucor also remains committed to boost production capacity, which should drive profitable growth and strengthen its position as a low-cost producer. The company should also gain from considerable market opportunities from its strategic investments in its most significant growth projects.
Nucor has expected earnings growth of 2.8% for 2021. Moreover, the consensus estimate for next year has been revised 9.2% upward over the last 60 days. The company has also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 57.5%. It also has an estimated long-term earnings growth rate of 12%.
Zacks Top 10 Stocks for 2021
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>
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Nucor Corporation (NUE) : Free Stock Analysis Report
Olympic Steel, Inc. (ZEUS) : Free Stock Analysis Report
Ternium S.A. (TX) : Free Stock Analysis Report
Schnitzer Steel Industries, Inc. (SCHN) : Free Stock Analysis Report
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