To measure volatility, we’ll look at the five-year beta, which is a measure of systematic risk. In theory, a higher beta means more volatility relative to the market and, hence, higher risk.
Investments in a cyclical industry like steel have never been for the fainthearted. Steel a high-beta industry, which means that the shares of steel companies fall or rise more than the broader market indexes rise and fall.
U.S. Steel (X) has the highest beta of 3.01 in our select group of steel stocks (MT). Steel Dynamics is the least volatile stock among these steel stocks, with a beta of 1.42. Nucor’s (NUE) five-year beta is 1.6, and AK Steel (AKS) has a beta of 2.89, while Cleveland-Cliffs’ (CLF) beta is 1.59.
Operating and financial leverages tend to impact stock prices. Companies with higher leverages are generally more volatile than companies with lower leverages.
Both U.S. Steel and AK Steel produce steel in traditional blast furnaces, while Nucor and Steel Dynamics produce steel through electric arc furnaces. Blast furnaces tend to have a high fixed cost structure, which increases AK Steel’s and U.S. Steel’s operating leverage. This holds especially true given the current volatility in steel prices.
But along with its high operating leverage, AK Steel also has a higher financial leverage, which we’ll discuss in the next part.