Cramer's 'Mad Money' Recap: Domestic Steel Is Back

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Despite the severe downturn in the economy, steel stocks are one of the best performing groups in the market, Jim Cramer told students Wednesday at his live "Mad Money" TV show at Penn State University's Smeal College of Business.

Cramer credits the surge in steel stocks to 52-week highs to industry consolidation, dramatically lower capacity and decreased steel imports.

In the 1980's, he pointed out, there were 12 large domestic steel companies, two of which were in the Dow Jones Industrial Average. Today, there are only three, and none of them are worthy of inclusion in the Dow.

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This industry consolidation, Cramer noted, has made the three remaining players much stronger and much more valuable.

Cramer also noted the industry consolidation led to a dramatic decline in production capacity and strong demand for steel as well as higher prices.

Cramer also credited the "renaissance" in steel to a decline in steel imports. Strong internal demand from countries such as China and India, coupled with higher freight costs and a weaker dollar have led to a sizable decline of imported steel in the U.S.

According to Cramer, investors should expect to see more weakness in the steel stocks and take advantage of down days to begin buying.

Student Pitches

Cramer listened to stock ideas from members of Penn State's student-run investment club, the Nittany Lion Fund.

The first student suggested buying Nike NKE, a stock that has been up in this down market. Cramer agreed that Nike is a strong company and liked the idea of sticking with the winners.

A second student liked Excelon EXC as a clean energy play with a great dividend. Cramer questioned the company's nuclear efforts, but said a strong dividend stock is perfect for this environment.

The third student asked about Allergan AGN, makers of Botox. Cramer recounted Allergan's earlier losses and a weakening economy. He called the stock "a tough call" and said he's still on the fence.

The final student picked Raytheon RTN as his favorite defense play. Cramer agreed with this pick and said he owned Raytheon for his charitable trust, Action Alerts PLUS.

A Man of Steel

Cramer returned to his steel thesis to recommend U.S. Steel X, a stock that he's liked since he first recommended it in January, 2006. During that period, U.S. Steel shares have increased 149%, but Cramer says the company is still cheap.

Cramer says U.S. Steel trades at just 11 times expected 2009 earnings while competitors like NuCor NUE trades at 12 times earnings and AK Steel AKS trades at 13 times earnings.

Cramer welcomed John Surma, CEO of U.S. Steel, to the show to discuss the company's outlook. Surma said his company survived the fall of the steel industry by making smart decisions. He said he sees a strong future ahead of the company.

Regarding competition from cheap, imported steel, Surma explained that the playing field has been significantly leveled over the years. His company is now more competitive, with increased productivity and new labor contacts, which give it a strong cost position.