Steel Dynamics: A Steal of a Stock

In this week’s industry review, we find some returning sectors from last week and a few new entrants on top.

The Top 3 remained unchanged as Alternative Energy (PBW) stays number 1 outpacing the S&P 500 (SPY) by 12.02%. Coal stocks (KOL) and Oil Machinery shares (OIH) flip flop with Coal taking over the 2nd spot, moving up 5.65% more than the index as Oil Machinery tacked on 3.13% more.

The Correct Call screened all the companies in these industries and came away with nothing we were comfortable recommending.

It’s in the newcomers, steel (SLX) and semiconductors (PSI), that we find some ideas of interest.

Steel prices are on the rise because demand is outstripping supply. Around the world growth in production is slowing, but demand, despite US recession worries, continues to be surprisingly high. According to Wu Xichun, former chairman from the China Iron and Steel Association, steel consumption could increase by close to 13 percent this year; while the growth in production will slow to 10 percent.

Adding to the squeeze, China needs to reduce steel exports by more than 25% to meet its internal demands in 2008. China is responsible for about 30% of the globe’s steel production. In India, the story is the same, prices on the rise with internal demand growing…

One of the Steel Stocks passing our screen is Steel Dynamics (STLD). STLD, like most steel stocks, is benefiting from the rising cost of…steel. Industry insiders expect this trend to continue for at least the next 6 months. Recently Morgan Stanley and UBS upped their forecast for Steel Stocks, with UBS saying the cost of the metal could nearly double in’08.

UBS and Morgan are not alone, as 8 of 9 analysts have raised their estimates for this quarter and 9 of 11 increased their yearend total for Steel Dynamics.

In 2004, when prices of steel only increased 50%, STLD’s share nearly doubled, starting the year at a split adjusted price $5.50 and rising to a high of $10.

Looking at STLD’s chart, in the short term Steel Dynamics price might be a little overextended, but any move back to 33-34 would be an absolute buying opportunity. Or maybe, the recent spike in STLD’s price could indicate an acceleration in momentum, meaning a much a higher share price to come.

We'll write more later on another steel pick and a solid semiconductor.

Disclosure: None

Comments

[haydete]

steel is SLX, not ICF.

[farsighted]

STLD's chart shows it might be heading to $40 in the short term.

STLD has it's earnings report on 4/21, there may be a run towards earnings in the next few days, especially if the market cooperates.