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For value investment in the steel sector, check out Posco

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When the steel sector slumping due to the downturn in the global economy, South Korea's Posco ( PKX , quote ) is attractive to investors looking in the materials sector for growth and value investment opportunities.

Over the last year, the exchange traded fund for steel, iShare Global Materials ( MXI , quote ), has fallen by 24.04%. Over the same period, Posco has fallen by 27.28%. Year to date, Posco is off by 4.86%. The decline in share price has continued with another 2.69% drop last week. The trend is not the friend of shareholders in Seoul-based Posco.

Neither is declining economic growth in China. Posco is very much reliant on China's robust demand for steel, as is much of South Korea . The People's Republic's falling demand for steel has created a bleak short term outlook for Posco.

But the future certainly holds promise for value investment in Posco. The company just entered an agreement with Toyota , ( TM , quote ), threatening the position of Nippon Steel.

Posco's price-to-earnings growth ratio is only 0.69. Investing legend Peter Knight calls this one of the most important financial indicators. A price-to-earnings growth ratio of 1 is considered to be adequate: it fairly values the growth prospects of the company. With a price-to-earnings growth ratio of 0.69, the future growth of Posco is selling at a more than 30% discount. That's good news for a value investment.

Another bullish indicator for Posco is its return-on-equity of 23.07%. The average-return-on-equity is around 15%. The return-on-assets of over 15% is very bullish, too. Posco's profit margin of 15.23% is very high for a steel company. Arcelor Mittal ( MT , quote ), the biggest steel maker in the world, has a profit margin of only 1.26%.

Now trading around $78 a share, the mean analyst target price for Posco over the next year is $93.38. For the next year, earnings-per-share growth for this value investment is expected to rise by more than 18%. The next five years is expected to bring in growth of 10.15%.

Debt is low, so additional revenues can go into expanding operations. Also low is the short float -- only 0.23%. By contrast Arcelor Mittal's short float is more than eight times bigger.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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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