Friday, September 6, 2013
The "smart money" is betting that one of the world's most hated sectors – a sector that has already fallen 15% in 2013 – is headed lower.
I disagree. In fact, we are seeing several catalysts that suggest this sector is ready to stage a huge rebound. These stocks are incredibly depressed. If the trend turns around, traders could see big, double-digit gains in a matter of days... The long-term returns could be much higher.
Let me explain...
Steel stocks have to be the most hated sector in the world.
Flagship steelmakers U.S. Steel (X) and AK Steel (AKS) are down an average of 75% since early 2011... It's been a brutal two-year decline. (And keep in mind, the benchmark S&P 500 is up 30% in that same time.)
Even since the epic 2009 bottom, U.S. Steel and AK Steel are down. There aren't many major stocks you can say that about.
The problem is that the world has been stuck in recession. There's less demand for houses, construction, and cars. These are the biggest end markets for steel.
First came the U.S.' credit crisis... and slow recovery. By 2010, it looked as if steel was finally in an uptrend. But then Europe fell into a debt crisis. Countries like Italy, Spain, Greece, Portugal, and Ireland needed lifelines as their banking systems almost collapsed. Europe is one of the biggest markets for steel.
Finally, China's economy began to slow. Instead of the government lowering (easing) short-term interest rates to stimulate the economy (like here in the U.S.), it had to raise rates in an effort to control inflation. The result was weak demand for steel – and a huge decline in steel prices.
And that brings us to today...
You see, markets around the world are starting to grow again. Europe is on much better footing today than one year ago. At a press conference on Thursday, European Central Bank President Mario Draghi said, "Europe is gradually recovering driven by domestic demand. Inflation is expected to remain low – and there's been a substantial improvement in bank funding."
Plus, China is starting to see a rebound as well. The emerging market's Purchasing Managers Index, which measures manufacturing activity, jumped to a 16-month high last month. And investment firms Deutsche Bank and Citigroup just raised China's gross domestic product estimates for next quarter.
In the U.S., mortgage rates (at 4.65% today) are at historically low levels. Plus, banks have eased credit limits to borrowers over the past few years, making it easier to buy homes. And the U.S. auto market – one of the largest end markets for steel – is on fire. The big automakers say over 16 million cars were sold in August. That's the highest monthly sales figure in almost six years.
Deutsche Bank and mining giant Rio Tinto predict steel prices will rise at least 3% annually over the next few years. China Iron and Steel Association, a nonprofit organization that has over 100 key members from top steel companies and institutions in China, forecasts growth of 4% to 5% annually over the next few years. These are not massive numbers. But they are much stronger than they were during the recent crisis years.
For the record, I am not predicting a massive global economic boom any time soon. But the markets in China, Europe, and the U.S. are on much stronger ground compared to 2009. And stocks like U.S. Steel and AK Steel are trading below 2009 levels.
My favorite name in the space is Steel Dynamics (STLD). I've mentioned this stock several times in Growth Stock Wire. It has the highest margins in the industry. And it pays a huge 3% yield.
Subscribers to my Small Stock Specialist newsletter are already sitting on 40% gains in this stock.
Steel Dynamics still looks attractive at these levels. However, you should also consider U.S. Steel and AK Steel. There are 17 analysts covering U.S. Steel. Yet, only four have buy ratings. Plus, over 27% of the float is short. That's a huge number betting against the company.
AK Steel doesn't look much better. It has 16 analysts covering the stock. And only two have buy ratings. Plus, over 26% of its float is short.
Expectations for these two names are at extreme lows. That means any good news could result in a quick 30% gain in a matter of days. If the short-sellers are forced to cover (buy back their positions), you could see even bigger gains.
My advice is to buy U.S. Steel and AK Steel at current prices. These companies are trading at lower levels than in 2009, when some economists were predicting the end of the world. That's not the case today. If we continue to see even mild growth in the major steel markets, these two names will be big winners.
Steel is one of the market's major "boom and bust" sectors. It enjoys huge upswings... and then crushing downswings. Catch one of these big upswings early, and you may never have to work again. But catch one at the wrong time, and you'll lose a fortune. Learn how to master the resource market's cyclicality in this interview with master resource trader Rick Rule.
Another "boom and bust" sector has been quietly booming for more than a year. "Every few years, it draws in 'hot money,' fueling a huge run," Amber Lee Mason and Brian Hunt write. And "there's plenty more upside left." Get all the details here: No One Is Talking About This Astonishing Bull Market.
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