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.
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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.
In fact, in the second half of 2013, steel imports grew 4%. And there has been no evidence of slowing down. This means that the market for domestic steel will continue to face headwinds over the next several months, to say nothing about the adverse impacts of weather, which have hurt scrap supply.
Accordingly, back in December, management guided fourth-quarter earnings in the range for 35 cents to 40 cents. While the low-end of the range implies both a year-over-year and sequential decline, the company deserves credit for being more "realistic" about the company's outlook and not giving in to the Street's pressure to manufacture growth out of thin air.
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Investors continue to discount the strain U.S. steel companies have felt, particularly those that rely on foreign economies like China and Europe where steel prices remain weak. And while steel stocks have enjoyed (on average) more than 40% gains in the trailing 6 months, there's been no evidence to support optimism that steel prices in these foreign markets will grow -- at least commensurately to what we've seen in the U.S.
All of that said, I still like Nucor's long-term prospects. And there's no question that the company is adequately positioned to benefit when this downturn is over. Until then, however, I don't believe the stock is attractively priced. And I worry that, as with Steel Dynamics, investors have already priced in a steel recovery that has yet to fully materialize.
There is, of course, a chance that I could be wrong here. Nucor could deliver stellar results and the stock will continue upward. Still, is it worth the risk of losing the 22% 6-month gains? Instead, purely from a valuation perspective, I would look to a company like ArcelorMittal (MT). Expectations are not as high. And the company is not as susceptible to valuation correction when steel prices stabilize.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.