NEW YORK ( TheStreet) -- The recent activity in shares of Steel Dynamics ( STLD) affirms that when sentiment in a once-struggling industry takes a turn for the better, investors prefer to align themselves with an industry leader rather than laggards. While I don't necessarily have a problem with that, it just doesn't always work.
Unlike ArcelorMittal (MT) and U.S. Steel (X), underperformers in the trailing twelve months, Steel Dynamics stock enjoyed close to 50% gains in 2013. But investors seem to have quickly forgotten that back in December, management issued fourth-quarter earnings guidance in the range of 21 cents to 25 cents per share, which would (on the low end) represent a 22% year-over-year decline. The company's clearly getting the benefit of the doubt
Steel Dynamics has a solid reputation as a leading producer of integrated steel, yet has shown no immunity to what remains a brutal steel environment hurt by weak prices and slumping demand. With shares now resting near 52-week highs, investors still resting their faith on an uptick in non-residential construction must decide if there's immediate value in these shares relative to what Steel Dynamics can realistically offer in the future. And I don't believe the risk-reward tips in their favor.
Steel Dynamics is due to report fourth-quarter earnings Monday. Hoping that there's hidden value to the slight improvement in flat roll pricing, investors have disregarded management's cautious tone. Even if pricing did perk up, there's still too much at stake here to believe that it will be enough to offset the weakness in overall steel shipments or the recent increase in scrap costs.