Two Brazilian Steelmakers Already Up 25% YTD

Two Brazilian steelmakers are already up 25% this year. With the first full trading week over, I was researching the top performing ADRs. These two steel companies kinda stood out because of their rise in price.

Commodity prices have fallen tremendously in the past few months and steel has been no exception. As the demand for commodities like silver, steel, plastics, tin, aluminum, etc. collapsed, companies manufacturing those commodities got slaughtered. Alcoa (AA) recently announced a big layoff and cut in production due to lower demand for aluminum. Construction is slowing worldwide. Hence demand for steel should be going down which would make the steel stocks go down as well.

However that is not happening now. Steel stocks are rising. Apparently the steelmakers have cut production to reduce the supply as the demand has fallen. CommodityOnline.com says:

“The slaughter undergone by steel prices recently seems to be over; announcements from steel producers that they are slashing output has apparently persuaded the market that they mean business about getting supply closer balanced with likely future demand.”

Demand may pick in the USA if the Obama stimulus plan is implemented which may invest heavily in a massive infrastructure upgrade.

Brazilian Steel Stocks:

1. Companhia Siderurgica Nacional (SID) is up 25.76% year-to-date, (as of the close Friday). SID is a fully integrated steel producer making many related products. In addition to steel, the company produces limestone, dolomite and tin. SID pays a dividend of 1.12% and the annual revenue growth is about 25% over the past five years. As per an S&P Quantitative Stock Report dated Jan. 3, 2009, a $10,000 investment in SID 5 years ago would have grown to $46,217, for a return of 462%.

2. Gerdau S.A. (GGB) operates 43 factories in Latin America and North America. The current yield is 1.88%. Annual earnings growth over the last 5 years is 47%. In 2008 the company had about $20 billion in revenue.

As commodity prices continue to make wild moves in 2009, it will be interesting to watch the sector stocks. Though the price of steel seems to be stabilizing now, investing in stocks in this sector is highly risky. Only those investors who have stomachs for gut-wrenching roller coaster rides should invest in commodity stocks.

Comments

[Conan the B...:]

Both of these stocks are commodity stocks. The annual growth rate occurred during a Golbal expansion. That expansion no longer exists.

Who are their main competitors? What is their market share? Free cash flow, balance sheet ratios, etc. Just because they were down a lot and bounced doesn't mean they are alive and well and ready to expand again.

January Effect or Dead Cat Bounce stocks. The Global steel industry is contracting, why are they more interesting than say X or AKS or even STLD?

Jan 12 11:48 AM

[secmaven:]

They are more interesting because of sponsorship. The stock is not in weak hedge fund liquidating hands. So the momentum players and stock chasers are on board for a quick run. This move is not based on any fundamentals I can see. And when the ride is over the stock buyers who though these stocks were investments will be left holding the bag.

Jan 12 12:35 PM

[Conan the B...:]

Thanks, Dead Cat syndrome. I did not do any research. I was hoping that the Article writer had done his before making the recommendation.

Jan 13 12:59 AM

[prudentinve...:]

You may also wish to look at USNZY if you are into Brazilian steel makers.

Regarding paultaut's comment "why are they more interesting than say X or AKS or even STLD?", my input, for what it's worth, is that the Brazilian steelmakers are not more interesting, except for diversification.

Jan 17 11:17 AM