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Value Investors Find Bargains in U.S. Steel and Gerdau

World steel usage is expected to increase by 3.3% in 2014. Massive urbanization in the world's most populous nation, China, will increase demand there by 3%. India, the world's second most populous nation, will have 5.6% higher demand. This growth, combined with undervalued stock prices, means that investors will be looking at handsome profits.

The efficient market theory would predict that the share prices of Gerdau SA, U.S. Steel, AK Steel and ArcelorMittal would rise until all are fairly valued. This has happened with other cyclical industries time and time again.

This stock rise appears to be underway already as Gerdau SA (37.15%), U.S. Steel (57.21%), ArcelorMittal (40.69%) and AKS Steel (72.35&) are all up significantly for the last six months.

Big changes could be afoot.  With so much liquidity sloshing around, activist investors could take a position and force changes. Assets could easily be stripped. Managerial changes could be enforced. Low valuations and improving conditions make the industry ripe for that type of action.

Mergers and acquisitions are also a possibility.

Utilization rates and values are low -- ideal conditions for consolidation. The Chinese have been buying up natural resources around the world, so why not move up the food chain and buy a steel company or two? After all, that was the modus operandi of ArcelorMittal as it rose to become the biggest in the industry (only to be steamrolled by the Great Recession).

The outlook for the steel sector is unmistakably improving.

The stocks reflect that position. But the equity prices are still well below the levels from The Great Recession. The exchange traded fund for the industry, Market Vectors Steel (SLX), now around $48.50, was over $114 a share in May 2008. There is still much room for recovery in the steel sector, which should take the stock prices for Gerdau SA, U.S. Steel, AK Steel and ArcelorMittal higher.

At the time of publication the author held no positions in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Yates is a financial writer who has had thousands of articles appear in periodicals and Web sites such as TheStreet, Newsweek, The Washington Post and many others. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate, on both committee and personal staff. He was also General Counsel for a publicly traded corporation. He has degrees from Harvard University, Georgetown University Law Center and the Johns Hopkins University.
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