ZachStocks

Steel stocks have had a great run over the last few years. As the Chinese economy has grown, there has been a rise in demand for steel which has taxed supply in many exporting countries. Compounding the situation was strong US construction markets both in the residential area as well as commercial. Higher commodity prices have created higher profit margins for the steel producers and many have seen their businesses grow tremendously.

Nucor (NUE) has benefited from this trend as the stock price rose from below $10.00 in 2003 to above $60 currently. However, the stock has begun to show chinks in its armor as it has struggled to maintain an uptrend even while peers such as Allegheny Technologies (ATI) show more relative strength. Volume has picked up fairly dramatically in late June as the stock absorbed a bad pre-announcement from the company and has recently fought back but with anemic volume flows.

At the beginning of June, analysts were expecting Q2 earnings to come in somewhere near $1.42. However, the company guided lower stating that it was more reasonable to expect $1.05 to $1.15. Part of the report noted a surge of imports of flat rolled steel from China which is putting pressure on domestic steel prices. Most analysts that I have read do not expect this to be a continuing trend, but it is a little uncanny how quickly the bad news is dismissed in their reports and makes me wonder if there is still too much optimism built into the share price.

Another factor that may be weighing on the stock is a recent acquisition of Harris Steel. As with any acquisition, there is a risk that the company will face more difficulty than expected in integrating the new company. While there are expected synergies stemming from lower overhead and combined purchasing power, if these synergies are not realized in a timely fashion, investors will lose confidence in management which may lead to additional selling.

While I don’t currently have a short position in the stock, I am watching the trading pattern carefully to find a low risk spot to enter the trade and then I would be likely to add to it as I realize profit and become more confident in the trend. The company is scheduled to release earnings tomorrow with the conference is at 2:00 PM. I would listen closely to see what management expects for the rest of the 2nd half. If they do not paint an improving picture, you will likely see the stock take another hit and probably continue to establish a downtrend.

FD: Author does not have a position in NUE

Additional Reading:

Kingsland says there’s Nothing Scrappy About Scrap Metal

Stock Market Beat compares Nucor to Gerdau