Steel Shares Slump in January

Steel stocks headed southward in January as the S&P Steel Supercomposite Index dropped 12.4%.
By Michelle Applebaum ,

Steel stocks lost their footing last month, as a slew of companies underperformed the market.

Moving forward, though, there are improving fundamentals driven by demand in China, higher prices for raw materials and low inventories.

Steel Stocks Lose Footing in January

: Steel and steel-related stocks underperformed the market in January, with 28 stocks underperforming the S&P 500's 4.6% decline and only 12 stocks outperforming the market. After a 9.6% advance in December, the S&P Steel Supercomposite Index dropped 12.4% in January, as early gains driven by upside earnings surprises reported by

Worthington Industries

(WOR) - Get Report

and

Schnitzer Steel Industries

(SCHN) - Get Report

were reversed as less than stellar reports started to come in. In what was, in our view, a serious market misfire,

AK Steel Holding

(AKS) - Get Report

shares ended the month

up some 0.7%

despite a seeming fourth-quarter earnings beat that included a non-period Last-In-First Out (LIFO) gain that would otherwise have missed the mark by some 60%.

Other Earnings Reactions Confused

: We were equally surprised by the reaction to

Nucor

(NUE) - Get Report

, which reported roughly double consensus with an 11 cent "clean" quarter (normalizing the tax rate), while the company gave the single most bullish outlook they'd had in the past 18 months by saying "margins have a good chance of being healthier" in the first quarter.

That

comment from

this

management was almost as good as a dividend increase - oh wait, they did that last month too; still, the shares dropped some 7.6% by month-end.

US Steel

took a meaningful post-earnings drubbing, down some 21% despite in-line earnings, because guidance (which was spot on with our first-quarter forecast) was far worse than ridiculously overly-optimistic Street consensus for the first quarter. In our view the company performed very well in the quarter, but the Street may not understand that blast furnaces don't turn on and off in an instant and the current market volatility is expensive to deal with.

All Sub-Indices Fall in January

: Every sub-index fell this month. The two strongest performers in our coverage universe for the second consecutive month were the pipe & tube index, declining only 3.1% followed by the specialty steelmaker index which fell 4.7%. Our blast furnace steelmaker index fell 5.7% in the month, adjusting for

Severstal

-- which rose 40% on announced facility restarts - the blast furnace index would have been down some 12.2%. The metals service center and raw material provider indices declined 6.8% and 11.0%, respectively, while our minimill index plummeted 12.5%.

Outlook

: We are seeing improving fundamentals as surging demand in China, higher raw materials prices, and low inventories globally drive steel prices higher. The remainder of fourth-quarter earnings should contain very little good news but we're ready for a somewhat improved 2010.

Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.

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