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Nucor No Longer a Steal

NEW YORK (TheStreet) -- As with most commodity industries like aluminum and oil, steel stocks have lost their luster over the past couple of years. But that hasn't stopped investors from skating to where they believe the puck will be in 2014.

As evidenced by the 60% and 117% 6-month stock gains in US Steel (X) and AK Steel (AKS), respectively, bets have been placed on the expected rise in steel prices. While demand has ticked up a bit since the second half of 2013, it's nonetheless premature to assume that growth will be sustained and prices will remain high.

To that end, it's a bit surprising that shares of Nucor (NUE), which have soared more than 22% over the past six months, have done as well as they have. For instance, unlike Steel Dynamics (STLD), Nucor hasn't been able to capitalize on the recent optimism either from a revenue or gross margin perspective.

[Read: Hedge Fund Managers Flail in Retail]

As the largest steelmaker in the U.S., I'm not suggesting that Nucor isn't a well-run company. The margin issues aside, very few rivals, including AK Steel and U.S. Steel, can compare to Nucor when it comes to efficiency. My issue, though, is with the valuation, specifically the stock's P/E of 36, which presumes long-term outperformance.

To that end, when compared to Steel Dynamics' multiple of 21, Nucor investors have put too much faith that the company has fully recovered from the global recession. And let's assume investors are correct with their bullishness for a steel recovery. That still doesn't mean Nucor is the best way to play it. Plus, with Nucor management having cited the credit crisis still adversely affecting the company's operations, it's hard to feel good about the stock's risk/reward ratio.

On Tuesday management will try to put some of these concerns to rest when Nucor reports its fourth-quarter and full-year results. The Street will be looking for earnings-per-share of 40 cents on revenue of $4.78 billion, which would represent year-over-year revenue increase of 7.4%. Given issues related to overcapacity, which has increased the level of steel imports, 7% growth still seems a bit too optimistic.

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