It's Not Too Late To Shop For A Basket Of Steel

Summary

• New anti-dumping duties on foreign steel makers are leveling the domestic playing field for the first time in years.
• Domestic steel companies are already leaner following extended retrenchments in costs and plant closings.
• Negative operating margins should improve; their heavy debts should ease.

The lumbering U.S. steel industry could be laying the foundation for a renaissance of sorts, thanks in no small part to federal trade officials who finally cracked down on evidence of massive dumping by China and other foreign producers.

The shares of some of the major U.S. producer stocks wasted no time in vaulting skyward following the stiff tariffs announced March 1 by the Department of Commerce. But there appears still to be ample room for more upside in domestic steel's prospects in coming months.

More Foreign Dumping Protection In Wings

For starters, the new DOC anti-dumping duties apply only to cold-rolled steel. The preliminary duty orders amount to 266% on China, with lesser amounts on Japan (71%), Brazil (39%), India, Korea, Russia and the UK.

A second steel trade case pending with the DOC alleges dumping of hot-rolled steel by some of the same nations, with a final determination expected in late May. Yet a third case alleges dumping and subsidization of corrosion-resistant steel into the U.S. by foreign producers, also with a likely May decision.

Altogether, foreign producers captured an estimated one-third of the domestic steel market in 2015, according to the United Steelworkers. With domestic producers suddenly competitive again from a pricing standpoint, their gains should be compelling.

Stocks to consider here include United States Steel (NYSE:X), AK Steel (NYSE:AKS), Steel Dynamics (NASDAQ:STLD), Schnitzer Steel (NASDAQ:SCHN) and Cliffs Natural Resources (NYSE:CLF). Cliffs is not actually a steel producer, but rather a supplier of iron-ore pellets to the North American steel industry - thus, it should see a smart pickup in demand from its newly revitalized customers.

More Share, Higher Prices

The steel names listed should all be able to pick up some U.S. market share, and some experts believe domestic steel prices may continue to rise in coming months.

US Steel may see smaller gains from here than the others because of its heavier reliance on business from ailing energy drillers, and its larger percentage of sales in Europe.

AK Steel, meanwhile, should benefit from its emphasis on sales to the strong automotive market, and Steel Dynamics will be bolstered by its emphasis on sales to the percolating housing and construction industries. As for Schnitzer, a recycler of scrap metal, the absence of unfairly priced foreign steel should be a real boost to margins and customer demand.

To be sure, most of these stocks have already seen big gains. In early trade March 8, X was up 70% year to date, AKS was up 80% YTD, STLD was ahead 16%, SCHN was up 20% and CLF had risen a stellar 117%.

But the 2016 gains so far are coming off of a multi-year decline in domestic steel shares. JP Morgan noted metals & mining stocks only recently were at 2009 lows. Moreover, these are all cyclical names, meaning the swings off of their bottoms can be violent. For instance, coming out of the 2009 trough, X skyrocketed from $18 to $50 per share - a gain of 177% in less than a year.

Meanwhile, declining hot-rolled sheet prices in the U.S. have apparently reversed off of a recent bottom of $340/ton.

Since the domestic market environment has changed, investors may want to keep an eye on the price-to-sales ratio of these players as future quarterly results unfold. Their current levels suggest undervaluation. X stands at a lowly 0.17, AKS at 0.11, STLD at 0.68, SCHN at 0.27 and CLF at 0.26.

CONCLUSION: A basket approach to buying these stocks - i.e. buying several or all of them in roughly equal total dollar amount transactions -- may make sense now. They can all move in tandem higher since the macro environment of unfair competition has been altered. Even as their individual stock performances eventually diverge, the basket buying approach to these stocks allows the investor to capture an overall favorable pricing trend.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.