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Forging Profits: Exploring the Power of Steel Stocks
This week we're exploring a trio of steelmaking stock picks, while also checking out some trending securities and an exciting investing strategy. Read on to find out more!
Hello, and welcome to another edition of Investing Intel from the team at ValueTheMarkets! As always, the newsletter is packed with stock picks and investing insights we think you’ll enjoy, including:
👉 Three stock tips
👉 Investing signals
👉 Key dates for your diary
👉 Investment strategy insights
This week, steel is the name of the game.
The steel industry is witnessing strong demand, driven by the construction, automotive, and energy sectors. The global push for infrastructure development and renewable energy, as well as recovery in automotive and construction industries post-Covid-19, bodes well for steel demand.
Keep your eyes peeled for strong manufacturing data from major economies like the US and China as a gauge of how well the industry is performing and how high prices could climb.
Without further ado, let’s steel ourselves for a trio of hot steel stocks!
The Market Leader - Nucor Corporation (NYSE: NUE)
Nucor is a leader in the American steel industry, giving it a strong market position and the ability to leverage scale for better pricing power and operational efficiencies.
The company’s operations span the entire steel production process, from raw materials to finished products. This diversification helps insulate the company from volatility in any single area of the market.
Nucor's mini-mill business model, which uses electric arc furnaces to melt scrap steel and produce new steel products, is more cost-effective and environmentally friendly than traditional steel production methods.
Nucor has consistently maintained a strong balance sheet and profitability, making it well-positioned to weather market downturns and invest in growth opportunities.
The company has a track record of successful growth initiatives, including capacity expansions, strategic acquisitions, and the development of new, high-margin products.
Heavily Diversified - Companhia Siderurgica Nacional SA (NYSE: SID)
CSN is a leader in the steel industry in Brazil, giving it considerable market power and economies of scale. It's also a major supplier to the automotive, construction, and packaging industries, which can see an uptick as the economy rebounds post-COVID-19.
Apart from its primary business in steel, CSN is also engaged in mining, cement, and logistics, providing a diversified revenue stream which can help mitigate sector-specific risks.
The company’s mining division, CSN Mineração, is one of the main iron ore exporters in the world. The strong demand for iron ore, especially from China, bodes well for CSN's revenue and profitability.
CSN has been focusing on reducing its debt levels and improving its balance sheet, which can enhance the company's financial health and investor confidence.
Brazil is expected to invest significantly in infrastructure development, a positive sign for steel demand. This could drive CSN’s growth shortly.
CSN's mining segment makes it largely self-sufficient for its iron ore needs, shielding it from the volatility of raw material costs.
The Recycler - Gerdau SA (NYSE: GGB)
Gerdau is a prominent player in the long steel segment globally, and the leading producer of long steel in the Americas. It also benefits from having a vast distribution network and a robust customer base.
The company has a diverse product portfolio catering to various sectors like construction, automotive, and agriculture, which can help mitigate risks associated with any one sector. Moreover, Gerdau's global presence enables it to tap into various markets, offsetting the impacts of regional downturns.
Gerdau has a high percentage of scrap-based steel production, which is less vulnerable to the volatile prices of iron ore and coking coal, thus providing a cost advantage.
Gerdau has been expanding its footprint through acquisitions and investments in strategic markets, further strengthening its global position.
The company has been focusing on sustainability, a factor increasingly important to modern investors. Gerdau is a leader in scrap recycling in Latin America, and it has been investing in energy efficiency and renewable energy projects.
Gerdau has been working on improving its financial health by reducing debt, selling non-core assets, and improving operational efficiency. These steps could increase the company's financial flexibility and make it more attractive to investors.
This week for our investing signals, we’re looking at some of last week’s biggest trending stocks. Filling out the list this time is:
Perrigo Company (NYSE: PRGO)
Activision Blizzard (NASDAQ: ATVI)
BridgeBio Pharma Inc (NASDAQ: BBIO)
UnitedHealth Group (NYSE: UNH)
Coinbase Global (NASDAQ: COIN)
Perrigo tops our list after its Opill drug was approved by the Food and Drug Administration as the United States’ first-ever over-the-counter contraceptive pill. The news is perhaps particularly prescient at present given the Supreme Court’s overturning of Roe v Wade and subsequent rolling back of access to abortion and birth control.
Next up is Activision Blizzard, hitting headlines as UK regulators appeared to once again open the door to the company’s acquisition by Microsoft. The Competition and Markets Authority want two more months to consider a modified offer.
BridgeBio Pharma has seen its share price soar after its experimental heart disease treatment achieved positive results in a late-stage study. Meanwhile, UnitedHealth Group enjoyed a share price bump after its latest earnings eased investor worries about costs.
Finally, Coinbase Global has seen its share price leap by nearly 30% over the last week after a court ruling about the status of Ripple when sold to institutional investors worked out in the crypto exchange’s favour. The Judge’s ruling that Ripple is defined as a security when sold to institutional investors means that sales through exchanges like Coinbase did not breach securities regulations, according to a note from Needham analyst John Todaro.
Dates in the Diary
Monday 17th – Chinese GDP (Q2) / Chinese Industrial Production (Jun)
Tuesday 18th – US Retail Sales (Jun) / US Industrial Production (Jun) / Canadian Inflation (Jun)
Wednesday 19th – US Housing Data (Jun) / Eurozone Inflation (Jun) / UK Inflation (Jun)
Thursday 20th – US Home Sales Data (Jun)
Friday 21st – Canadian Retail Sales (May) / UK Retail Sales (Jun) / Japanese Inflation (Jun)
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Investing Strategy Ideas: Pair Trading
According to the internet, “all good things come in pairs” is an ancient Chinese proverb. Whether that’s true or not, we can probably agree that some good things come in pairs.
On that note, let’s get stuck into pair trading.
Pair trading involves picking two stocks with a historically high correlation and taking a long position on one under-valued security, but a short position on another over-valued one. The aim here is to identify a market imbalance which will correct in time, resulting in divergence or convergence of share price.
For example, an investor engaging in pair trading might buy a $20 stock and short a $30 stock. In this situation, they are betting on a convergence of share price, which would potentially allow them to benefit from the first stock making gains and the latter falling in price.
It sounds simple enough, but the complex part is identifying the pair. To do this, an investor needs to work out a historical correlation between two stocks, one of which needs to be over-valued and another which is under-valued.
You might do this by examining P/E ratios, P/B ratios, news coverage, and more methods besides or a combination of all of the above.
Once you’ve identified the duo, it’s time to take your positions and hold on to them until your predicted convergence or divergence occurs… or doesn’t.
That’s because it’s also worth noting that historical trends are no guarantee that any link between share prices will continue in future. This does mean there is of course a degree of risk to pair trading, even when a pair with high historical correlation is identified.
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Until Next Time!
Many thanks for taking the time to read Investing Intel today. We hope you’ve enjoyed our insights and are looking forward to more in the week ahead.
Have a good week!
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