After the spectacular rally, market sentiment seems to be turning negative towards US steel producers. August wasn’t a good month for US steelmakers. U.S. Steel Corporation (X) and AK Steel (AKS) have been among the best-performing steel companies in 2016. They lost 29.3% and 32%, respectively, in August. Nucor (NUE) and Steel Dynamics (STLD) have lost 9.5% and 8.2%, respectively, in August.
U.S. Steel is still trading with strong returns of 136% year-to-date. Now, the question for U.S. Steel investors would be how much of these returns they can salvage before the year ends. In this series, we’ll look at the different fundamental drivers for U.S. Steel. We’ll look at the company’s valuation ratios as well as forward earnings estimates. Finally, we’ll see if the markets are valuing the company fairly. This would help us understand whether there’s more pain ahead for U.S. Steel investors.
We should note that steel prices are a key driver of steel companies’ financial performance. U.S. Steel’s earnings are especially leveraged to steel prices given its relatively high-cost operations. Later in this series, we’ll look at the recent trend in US steel prices and see what factors could drive prices in the coming months.
Investing in a single security can always be a risky affair. ETFs can bring you the benefits of diversification at a relatively low cost. The SPDR S&P Metals and Mining ETF (XME) gives you exposure to US-based metals and mining companies. With its ~50% exposure towards the steel sector, the ETF is a proxy steel play. So far, XME has gained ~75% in 2016.
In the next part, we’ll see how the markets are valuing U.S. Steel.