The average steel stock, as represented by the Market Vectors Steel ETF (SLX), has suffered brutally this year, falling almost 50% peak-to-trough, due to fears of a global recession, overcapacity in the global steel industry and an increase in the prices of some raw material inputs. However, the long-term outlook for the steel sector is bullish, driven mostly by economic growth in China and India. China now accounts for almost half of global steel output of 1.3 billion tons annually, and the Indian steel market is expected to grow from 124 million tons in 2012 to 275 million tons by 2020. Meanwhile, U.S. market share, at 6% of the global steel production, is shrinking, and it will slide to 5th place by 2020.
We recently analyzed which stocks would outperform when, at some point, the steel cycle reverses itself, and when steel demand and prices rise back to and above the highs we saw in the spring and summer of 2008. In this article, we identify steel sector stocks that are being accumulated, and those being distributed, by legendary or guru fund managers such as Warren Buffett, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli, based on our extensive database of the buying and selling activities of 60+ such managers. The steel sector is defined here as including companies involved in the production of steel products, and also those involved in the mining and processing of iron ore that is used in the manufacture of steel.
Based on our research, we identified that guru funds are slightly bearish on steel stocks, cutting a net $164 million from their prior $4.82 billion position in the group, selling $560 million and buying $396 million worth of stocks in the group. Furthermore, overall they are under-weight in the group by a factor of 0.6; taken together, guru funds have invested 1.1% of their capital in the steel sector compared to the 1.7% weighting of the steel sector in the overall market.
The hedge fund and mutual fund managers included in this select group include only high-profile names who, by virtue of their long-term market-beating returns, have earned their standing in the investment community and are worthy of our attention. They include well-known names such as those mentioned above, as well as perhaps relatively lesser-known names that also have stellar long-term history of beating the markets, such as Seth Klarman, John Griffin, Prem Watsa, Robert Karr and Lee Ainslie.
The following are the steel sector picks that these guru fund managers are most bullish and bearish about (see table):
Guru Funds Bearish on United States Steel Corp. (X): X manufactures flat-rolled and tubular steel products for the automotive, container, construction and appliance markets. Guru funds taken together have no position in this $3.3 billion leader in the steel sector, and they sold out their entire $63 million position from the prior quarter. The top sellers included York Capital Management Global Advisors LLC ($53 million) and Balyasny Asset Management LLC ($8 million).
Guru Funds Bearish on Vale SA (VALE): Rio de Janeiro, Brazil-based VALE is one of the world’s leading mining companies that specializes in the mining of iron ore and pellets, manganese, alloys, gold, copper, potassium, and kaolin. Guru funds cut a net $13 million from their $409 million prior quarter position, buying $15 million and selling $28 million worth of stock. York Capital Management Global Advisors LLC ($27 million) was the leading seller, and the top holders included Fisher Asset Management LLC ($329 million), RS Investment Management ($46 million) and Driehaus Capital Management ($19 million).
Guru Funds Bearish on Gerdau SA (GGB): GGB is a Brazilian producer and seller of common and special steel rods for the construction industry, as well as in the automotive and agricultural sectors. Guru funds hold only $7 million worth of stock or 0.08% of the outstanding shares in this $9 billion market-cap leading Latin American steel producer, after adding $2 million in the June quarter.
Guru Funds Bearish on Arcelor Mittal SA (MT): MT, one of the largest steelmakers in the world, is a Dutch manufacturer of finished and semi-finished carbon steel products used in the automotive, appliance and machinery markets. Guru funds hold only $2 million worth of stock or 0.01% of the outstanding shares in this $29 billion market-cap leading global steel producer, after cutting $2 million in the June quarter.
Guru Funds Bullish on AK Steel Holding Corp. (AKS): AKS is a U.S.-based manufacturer of flat-rolled carbon, stainless and electrical steels, and tubular products for the automotive, construction and appliance industries. Guru funds added a net $8 million to their $20 million prior quarter position, and they are over-weight AKS, as together they hold $28 million worth of stock or 3.3% of the company, far in excess of the 1.1% weighting of guru funds in the steel sector. SAC Capital Advisors LP has the largest position in AKS at $25 million, after adding $7 million in the June quarter.
Guru Funds Neutral on Companhia Siderurgic Ads (SID): SID is a Brazilian producer of galvanized, hot and cold rolled and tin mill steel products. Guru funds added a net $1 million to their $14 million prior quarter position, and they are severely under-weight SID, as together they hold $15 million worth of stock or 0.13% of the company, far below the 1.1% weighting of guru funds in the steel sector. Fisher Asset Management LLC has the only position, owning $15 million worth of SID at the end of the June quarter.
Guru Funds Bullish on Mechel Oao Ads (MTL): MTL, a mining and steel company in the Russian Federation, is engaged in the manufacturing of mining and steel products for construction, engineering, defense and other industries. Guru funds added a net $16 million to their $13 million prior quarter position, buying $24 million and selling $8 million worth of stock. Eton Park Capital Management LP was the sole buyer in the June quarter, adding a new $24 million position in MTL to their portfolio in the June quarter; Driehaus Capital Management is the other significant owner, holding $4 million worth of stock.
Guru Funds Bearish on Worthington Industries (WOR): WOR operates as a diversified metals processing company, focusing on steel processing and manufactured metal products for the automotive, construction, hardware and aerospace markets in the U.S., Canada, and Europe. Guru funds cut a net $122 million from their $176 million prior quarter position during the June quarter. Southeastern Asset Management Inc. ($116 million) and Royce & Associates LLC ($5 million) were the largest sellers of WOR.
Guru Funds Bullish on Commercial Metals Company (CMC): CMC is engaged in the recycling, manufacturing, fabricating and distributing steel and metal products, and related materials and services for the construction, manufacturing and fabrication industries in the U.S. and internationally. Guru funds added a net $55 million to their $57 million prior quarter position, buying $60 million and selling $5 million worth of stock. Icahn Capital LP ($57 million) and Royce & Associates LLC ($3 million) were the largest buyers of CMC.
Guru Funds Neutral on Cliffs Natural Resources (CLF): CLF is a mining and natural resources company, producing iron ore pellets, lumps and fines iron ore, and metallurgical coal products. It operates six iron ore mines in MI, MN, and eastern Canada; two iron ore mining complexes in western Australia; five metallurgical coal mines located in WV and AL; and one thermal coal mine in WV. Guru funds cut a net $5 million to their $161 million prior quarter position, and they are slightly over-weight CLF, as together they hold $156 million worth of stock or 1.8% of the company, above the 1.1% weighting of guru funds in the steel sector. The top holders of CLF at the end of the June quarter were Fisher Asset Management LLC ($95 million) and First Eagle Investment Management LLC ($28 million).
Guru Funds Bearish on Steel Dynamics Inc. (STLD): STLD is a U.S. manufacturer of flat-rolled, structural, bar and rail steels, and recycles ferrous and non-ferrous scrap metals. Guru funds cut a net $12 million from their $25 million prior quarter position, buying $5 million and selling $17 million worth of stock. Zweig-DiMenna Associates was the largest seller, selling $17 million worth of STLD in the June quarter.
General Methodology and Background Information: The latest available institutional 13-F filings of over 60+ legendary or guru hedge fund and mutual fund managers were analyzed to determine their capital allocation from among 50+ different industry groupings, and to determine their favorite picks and pans in each group. Each guru has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 60-odd guru funds that justify their inclusion in this elite group were detailed in our previous articles, many of which can be accessed by clicking on the hyperlinks referencing them in the above Table and in the article.
These legendary or guru fund managers number less than one percent of all funds and yet they control almost ten percent of the U.S. equity discretionary fund assets. The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence or even go as far as constructing a model diversified portfolio based on the guru funds best picks.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.