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Sunday, April 10, 2011

Steel Stocks a Steal?

While I was on vacation I got a chance to watch some of the talking heads on CNBC and Bloomberg explain which scheme they were pushing on investors lately. The one that I heard more than once was that the steel sector has been lagging and is particularly undervalued given the global economic recovery.

It doesn't matter what you look at, unless the company has a business outside of purely steel. It can be Gerdau (GGB) from Brazil, Arcelor Mittal (MT) from India, US Steel from America (X), or whatever else you examine. They have all trailed the market by a wide margin over the past year. Large excess capacity has kept steel prices from rising even with sharp increases in world industrial production. When you are in a commodities business and you don't have pricing power, things can get ugly. How ugly?

Well, if you bought these three, you have badly trailed the markets. What's more is that even with rising industrial production and construction spending, at least worldwide, prices are unlikely to recover anytime soon.

That's not to say that it isn't worth watching these three and the steel sector in general. At some point, that sector will turn up. It just may not be imminent. Until U.S. non-residential construction begins to pick up and auto sales really catch fire, this excess capacity will not likely be worn down.

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