Steel stocks have fallen, on average, 20% this year, ranking 130th of 154 industry groups on the S&P 500 Index. Yesterday, those shares -- including AK Steel (AKS - Get Report) and U.S. Steel (X - Get Report) -- jumped 7.1%, the fourth-best among sectors. Standard & Poor's Equity Research says the gains may continue into next year.
The White House is said to be supporting another big spending push on infrastructure efforts, which means greater demand for steel in bridges, airports and public buildings, just as the steel market is heating up after a long, deep cyclical trough. But investing in the steel industry isn't for the faint of heart as it's a mature, fragmented and competitive industry, and it has big exposure to other highly cyclical industries such as cars and construction.
Steel stocks have outsized long-term returns for investors who are patient. The average annual increase over 10 years is an incredible 26%, according to Morningstar.S&P industry analyst Leo Larkin told TheStreet in an interview there was a big sell-off on steel and materials stocks in 2009, when shipments dropped to the lowest levels since 1982. Since then, industry inventories have been whittled down and fundamentals have improved. And now demand has "gradually come back with a pretty good balance," he said. "Despite weak U.S. GDP growth in 2011's first half, domestic steel shipments rose 6% for the period," he said in his research note, "with solid gains registered by the industry's three key markets. Shipments to the auto industry rose 14%, while shipments to the construction and distributor markets advanced 6.1% and 9.8%, respectively. "Longer term, we think the industry will benefit from greater pricing power stemming from further expected consolidation, a lower cost structure, and a secular decline we see in the U.S. dollar," Larkin said in his research note. "If there's any push at all from the economy it would add" to the attractiveness of steel industry, Larkin said in the interview, just before news of a potential new round of government spending was reported. Larkin's top pick is Reliance Steel & Aluminum (RS - Get Report), which he gives a "strong buy" rating. Morgan Stanley (MS) analysts also suggest nibbling at the sector, saying in a research note to clients: "We would invest selectively, and recommend AK Steel for stock-specific reasons and Nucorp (NUE - Get Report) as a defensive play with considerable upside." What follows are synopses of five highly rated steel companies that Standard & Poor's cites in a research report on the state of the industry:
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