Steel Stocks Are on Fire. Let Investors Beware.

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Steel stocks keep climbing.


Tom Mihalek/Getty Images

Steel stocks were on a tear again Wednesday. Why is anybody’s guess—and that might be a warning sign for investors.

Shares of

United States Steel

(ticker: X) were up 6.5% in the afternoon to hit a new 52-week high, and closed up 4.3%. Both the

S&P 500

and

Dow Jones Industrial Average

ended the regular session down 1.1%.

Also on a roll were

Nucor (NUE),


Steel Dynamics

(STLD), and

Cleveland-Cliffs

(CLF). The stocks were up 1%, 0.5%, and 2.5%, respectively. All three hit their 52-week highs on Friday.

There wasn’t much to pin Wednesday’s gains on. Instead, the stocks were probably still rallying on the $1 trillion infrastructure bill passed by the Senate a week ago. Since then, the four steel stocks are up 8%, on average. Nucor is up the most, gaining about 13%.

Still, investors need to keep other things in mind. In China, prices for iron ore—key raw material in steel production—are down about 27% over the past month. Steel prices can trend with ore prices. And because China is the world’s largest producer of steel, price changes there can be felt around the world.

Steel prices in the U.S. haven’t budged, though. Benchmark steel prices are up 6% over the past month and 87% so far this year. Higher demand than expected, coming out of the 2020 pandemic-induced recession, is a big reason for the sector’s rebound.

The price jump, of course, is why steel stocks have rallied. The four steel stocks are up more than 90% year to date on average.

In the spring, Barron’s pointed out that it was still a good time to buy steel stocks. Since then, the four stocks are up about 21% on average. The S&P has gained about 6%.

Valuations still look low. U.S. Steel, Cliffs, and Steel Dynamics shares trade for about 6 times, 7 times and 8 times estimated 2022 earnings, respectively. Nucor trades for about 11 times estimated 2022 earnings. Low valuations is one signal that investors believe pricing with come in.

Steel is going for about $1,800 a ton. The prices averaged about $600 in 2019.

Analysts are looking more cautious. Only Steel Dynamics has a Buy rating ratio above 50%. More than 70% of the analysts covering Dynamics stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P is about 55%.

The average analyst price target for Steel Dynamic stock is $81 a share, up about 15% from recent levels.

The direction of steel prices in the short term will dictate a lot about whether he stock hits that target. Even if the stock gives some gains back, it has been a remarkable year for Dynamics—and the entire sector.

Write to Al Root at allen.root@dowjones.com

William Murphy

William Murphy

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