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Bargain Shopping in the Steel (Industry) Bin

Stocks in this article: MT X

The two stocks are cheap by another measure, too. Consider their enterprise value (market capitalization plus debt, minus cash) in relation to their revenue. ArcelorMittal comes in at an EV/R of 0.57, indicating its revenue is almost twice that of its market capitalization and debt combined, and U.S. Steel comes in even smaller posting a diminutive 0.37.

Of course, there are macro-issues in the steel industry, including the glut of steel across the globe, low steel prices and overcapacity. ArcelorMittal, for its part, has been idling excess capacity and selling off non-core assets.

Another issue is the slowing growth of China, the world's biggest consumer of steel. Still, demand for steel in China is expected to grow 3% this year. Meanwhile, steel consumption this year is expected to grow 4.1% in the U.S. and 3.1% in Europe.

The time to buy steel stocks is now while the valuations remain compelling and before the industry, which is already recovering, peaks and stock prices become higher.

ArcelorMittal has posted net losses in each of the past three years, but some analysts estimate it will be profitable by the end of this year or the beginning of next year. On an Ebitda (earnings before interest, taxes, depreciation and amortization) basis, it is projected to earn $8 billion this year, up from $6 billion in 2013.

U.S. Steel, which is also losing money on a GAAP basis, posted Ebitda of $52 million, or 34 cents per share, the first quarter.  

The two steelmakers are sizable companies that offer relatively cheap stocks in an industry that produces an indispensable product. And remember that sometimes you can make the most the most money from buying low on unloved stocks.

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At the time of publication, the author owned shares of ArcelorMittal.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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