5 Steel Stocks to Boost Your Portfolio Even as Prices Retreat

The steel industry had a banner year in 2021 as steel prices touched all-time highs, allowing companies in this space to churn our record profits despite a spike in the cost of raw materials including ferrous scrap and headwinds from supply-chain and logistics issues.  

However, steel prices lost steam in the last three months of the year, partly due to the improving supply-side situation. Despite the pullback, prices remain elevated compared with historic levels while demand fundamentals for steel continue to be solid. In the current scenario, stocks like Commercial Metals Company CMC, TimkenSteel Corporation TMST, thyssenkrupp AG TKAMY, Nucor Corporation NUE and United States Steel Corporation X are worth adding to your portfolio now.

Industry Remains on Firm Footing

The steel industry staged a strong comeback last year after being battered by the fallout from the coronavirus pandemic in 2020, thanks to a strong revival in end-market demand and an upswing in steel prices.

The pandemic hurt demand for steel across major end-use markets for much of the first half of 2020. However, the industry rebounded strongly on solid pent-up demand and a rally in steel prices. The resumption of operations across major steel-consuming sectors such as construction and automotive following the easing of lockdowns and restrictions globally led to an uptick in steel demand.

An upturn in industrial activities is driving demand for steel. Demand remains robust across construction and manufacturing sectors. Order activities in the non-residential construction and equipment remain strong. Steel makers are also seeing improved demand in the energy space.

Steel prices also escalated to historically high levels in 2021. Notably, the U.S. steel industry reaped the benefits of record-high steel prices last year, courtesy of an upsurge in demand in major end-use markets and tight supply conditions partly due to production disruptions at domestic steel mills and sizable Section 232 tariffs on steel imports.

After hitting a pandemic-led low of roughly $440 per short ton in August 2020, the benchmark hot-rolled coil (“HRC”) prices witnessed a significant rally, breaking above the $1,900 per short ton level in August 2021 on the back of a mismatch between supply and demand.

However, HRC prices have come under pressure since October after peaking in September 2021, dragged down by shorter lead times and a slowdown in demand in automotive resulting from production cuts by carmakers in the wake of the semiconductor shortage.

The upswing in U.S. steel prices in 2021 also created an unprecedented price arbitrage between U.S. and international prices, thereby attracting imports of lower-priced foreign steel. The strong price arbitrage triggered more steel shipments to U.S. shores last year despite the hefty tariffs. Higher steel imports have been exerting downward pressure on U.S. steel prices of late. Rising production levels have also brought down steel prices. Steel production is expected to pick up going forward with steel mills having completed scheduled maintenances in the final quarter of 2021 and more capacity coming online this year.

Nevertheless, HRC prices (currently hovering around $1,600) remain elevated notwithstanding the recent steep correction from its peak levels. They are well above the year-ago levels and nearly four times higher than the August 2020 low.

Demand weakness in automotive is likely to continue as the chip shortages are unlikely to abate anytime soon.  Despite a slowdown in steel demand in the automotive space amid the ongoing chip crunch, healthy demand in other end markets including construction is likely to support HRC prices over the near term, driving profit margins of steel companies.

The massive infrastructure development project is also expected to be a significant catalyst for the American steel industry and U.S. HRC prices in 2022. On Nov 15, President Joe Biden signed the more than $1 trillion bipartisan infrastructure bill into law. The bill includes about $550 billion in new spending on roads, bridges, tunnels and the electric grid, as well as airports, broadband and other infrastructure improvements. The sizable infrastructure spending will spur demand for domestic steel.

Favorable Zacks Industry Rank

The Zacks Steel Producers industry currently carries a Zacks Industry Rank #39, which places it in the top 15% of more than 250 Zacks industries. The favorable rank reflects the industry’s strength. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

5 Steel Stocks to Snap Up

Notwithstanding the recent pullback in prices from historic highs, the favorable fundamentals make the steel space an attractive area to invest in right now. Strong end-market demand aided by higher industrial activities, still-elevated steel prices, and a sizable infrastructure investment bode well for the industry. Here we pick five steel stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) that are good options for investment right now.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Commercial Metals: Texas-based Commercial Metals, sporting a Zacks Rank #1, is gaining from robust steel demand, driven by elevated spending on the residential and construction sector in North America and recovery in the manufacturing sector. It continues to witness stellar demand for steel products across most end markets. In North America, the company is gaining from strong rebar demand, supported by the solid construction growth along with robust merchant bar and wire rod demand. Strength across the key end markets in both North America and Europe is supporting solid steel sales volumes. CMC also continues to gain from its ongoing network optimization efforts. It also has solid liquidity and financial position, and remains focused on reducing debt.

Commercial Metals has expected earnings growth of 10.5% for fiscal 2022. The Zacks Consensus Estimate for fiscal 2022 earnings for CMC has been revised 6.6% upward over the past 60 days. The company has also outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, it has delivered an average earnings surprise of roughly 7.4%.

TimkenSteel: Ohio-based TimkenSteel carries a Zacks Rank #1.  The company is benefiting from higher industrial and energy demand and a strong pricing environment notwithstanding the semiconductor supply-chain disruptions that are affecting shipments to mobile customers. TMST is seeing continued recovery in its industrial markets. Higher end-market demand and cost-reduction actions are also aiding its performance. It is benefiting from its efforts to improve its cost structure and manufacturing efficiency.

TimkenSteel has an expected earnings growth rate of 0.7% for 2022. The consensus estimate for 2022 earnings has been revised 22% upward over the past 60 days. The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 59.2%.

thyssenkrupp: Germany-based thyssenkrupp sports a Zacks Rank #1. The company’s actions to transform into a high-performance and sustainable group of companies contribute to its performance. TKAMY’s Materials Services unit is benefiting from higher prices and sales volumes. It is seeing an upturn in demand across Materials Services and Industrial Components segments on the back of the ongoing macroeconomic recovery. Its Automotive Technology unit is also benefiting from favorable demand conditions and structural improvements. A recovery in demand and higher market prices are also driving its Steel Europe segment.

thyssenkrupp has an expected earnings growth rate of 1,085.7% for fiscal 2022. The consensus estimate for fiscal 2022 earnings has been revised 41.8% upward over the past 60 days.

Nucor: Charlotte, NC-based Nucor, carrying a Zacks Rank #1, is benefiting from strength in the non-residential construction market and a recovery in the automotive market. The company is also seeing strength in heavy and agriculture equipment and improved conditions in energy markets. Higher demand is supporting its shipments. NUE should also gain from its strategic investments in its most-significant growth projects. It remains committed to boosting production capacity, which should drive profitable growth and strengthen its position as a low-cost producer.

The consensus estimate for Nucor’s 2022 earnings has been revised 10.1% upward over the past 60 days. NUE has a trailing four-quarter earnings surprise of roughly 2.7%, on average.

United States Steel: Pennsylvania-based United States Steel, carrying a Zacks Rank #2, is gaining from strong demand across end markets, its Best for All business model and higher domestic steel prices. It is witnessing strong consumer-driven demand. The investment in Big River Steel is also expected to be accretive to X’s earnings and will generate significant synergies. Cost-saving initiatives and efforts to improve operation efficiency are also driving its results.

The Zacks Consensus Estimate for United States Steel’s 2022 earnings has been revised 57.6% upward over the past 60 days. X also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 24.5%.

Zacks Top 10 Stocks for 2022

In addition to the investment ideas discussed above, would you like to know about our 10 top picks for the entirety of 2022?

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United States Steel Corporation (X): Free Stock Analysis Report
Nucor Corporation (NUE): Free Stock Analysis Report
Commercial Metals Company (CMC): Free Stock Analysis Report
Timken Steel Corporation (TMST): Free Stock Analysis Report
ThyssenKrupp AG Sponsored ADR (TKAMY): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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