The steel sector has been under pressure for a number of years, due to falling prices and weak demand. However, if you are like me, these trends have a tendency to catch your eye and pique your interest from the standpoint of a possible contrarian play.
Not surprisingly, most companies within the sector have not fared well and the stocks, overall, are pretty beaten down. But even when playing for a contrarian rebound, you cannot just blindly buy based on low prices. Instead, you have to be discerning and try to find the stocks that pose the best possible risk/reward.
I love value plays and it's generally how I play the stock market. Having said that, nothing interests me more when looking for a contrarian play than a company that has been able to buck the trend and perform well under difficult operating conditions.
One such company in my opinion is Commercial Metals Corporation (CMC), which manufactures, recycles, and markets steel and metal products in the United States and internationally. It has a market cap of around $1.73 billion, making it a little bigger than U.S. Steel (X), but much smaller than companies like ArcelorMittal (MT) or Nucor Corporation (NUE) for example.
The interesting thing about Commercial Metals is that the company has been able to remain profitable even in the current, tough operating environment of weak steel prices. The company produced earnings of $1.20 per share in the latest quarter and trades at a trailing p/e ratio of 12.4, which equates to an earnings yield of 8%. That's certainly not bad in this interest rate environment.
Furthermore, the stock pays a dividend of $0.48 per share, or 3.40%. As you know, I love dividend stocks and recommend that you always try to buy them whenever you can.
Looking at the stock's performance, it has held up well over the last five years (currently trading at just under $15 per share) amid the decline in steel prices. The company has $1.35 billion in debt, but plenty of cash on hand at $485 million. Its current ratio is a respectable 3.74.
As for competitors, it has Schnitzer Steel (SCHN), which is a somewhat smaller company (but nonetheless trading at a higher stock price), bleeding losses of more than $7 per share and U.S. Steel (mentioned earlier) that is also spilling red ink.
Nucor, the biggest company in the sector with a market cap of nearly $14 billion, is profitable, but trading at much higher multiple of 21. Not the same value, in my opinion.
What about the outlook for steel prices?
Well, Bank of America Merrill Lynch analyst Timna Tanners is forecasting an increase in (hot rolled coil) steel prices to $475 per ton in 2016. That would be up from the current price of $375 to $390 per ton, and it would represent the first increase in a number of years. It would also mark a recovery from the plunge that prices took this year.
Overall, I think that Commercial Metals looks like a good contrarian play. If you want a little more "bang for your buck" (i.e. a more speculative trade) you might want to look at U.S. Steel, which is showing small losses that quite possibly could be turned around if steel prices move higher next year. The swing from loss to profit would probably ignite a frenzy to buy the stock on the part of investors. It is currently trading at $8.21 per share.
