Tuesday, December 27, 2016

Rising Tide Raises All Ships

     After Trump was voted President, there was a lot of talk about what he would do to the steel industry. He had been saying that China has been taking manufacturing jobs away from the USA and how he will bring them back. The reason China can do that is because they have subsidized the steel industry. And they have done it against the rules of any trade laws that had been made. Steel is so cheap that they are just dumping it into the US market leaving no market share for domestic manufacturers to gain. The question remains... How will Trump negotiate the trade laws so that he can bring back US manufacturing, in this case steel and iron, and how will it affect domestic manufacturing as a whole?

     After doing a little bit of reading here and there, the trade policy are secondary to the potential profits from companies within the industry. What matters the most are the costs to the company. Manufacturing steel requires high fixed costs and the industry is very cyclical. Meaning they are prone to business cycles and the ups and downs that come with it. Quarter to quarter they can see profit turn into loss turn into profit. With Trump as president-elect, he has the potential to renegotiate all trade policy and increase the overall level of our economy. In that case the steel industry would rise along with everything else. The downside risks comes from Trump being too aggressive and harming the relationships the US has with foreign countries. Ultimately, if the US is too demanding, other countries may not be willing to import thus harming the domestic manufacturing. Historically, the companies with the lowest cost to produce and most flexible have done far better than competitors.

Year to date, all of the stocks listed in the Steel & Iron sector in the United States are performing incredibly well. As to be expected.

If you look through the charts and you would see something in common with almost every stock. It started it's run up when Trump was elected, peaked in late November or early December, and has run down a little bit this last month.

This is a chart I just made of all 10 stocks listed in one graph from January 1, 2007 until December 24, 2016.

I realize that it is incredibly hard to read. The top performing stock is Worthington Industries [WOR] at 186.60% followed by Steel Dynamics, Inc. [STLD] and Reliance Steel &Aluminum [RS] at 134.66% and 107.99%, respectively. You may be able to see that almost every stock has seen a very solid jump up near the end, followed by a fall. Worthington exaggerates it at the top. If you take a closer look, after the 91% by ROCK, there is a significant gap until the next company. This graph shows a pretty good picture of which companies were able to be flexible with their prices and continue to turn a profit during economic downturns.

After doing a little bit of research here and there and reading a couple articles, I have got myself a list of some of the stocks that I'll be watching. A couple that have been able to keep costs lower than others and some because of where they have positioned themselves after 2008. Keep in mind I'm still very uninformed, hence the name, but here is the list and why.

NUE  Nucor Corporation

     Of the 17 stocks that are in the Steel & Iron industry in the basic materials sector, Nucor has the largest market cap. They more than double that of Steel Dynamics topping out $20.30 Billion (Steel Dynamics is $9.18B). From the different reading and other research, this company looks like one of the safest long term buys. It likely won't return anything extravagant, but they have been able to control their manufacturing costs most efficiently to stave off horrible numbers amidst a downturn. They are headquartered in Charlotte, North Carolina.

Regarding the chart, there are some interesting factors to note. With the recent jump in steel, most of the companies you'll see are overbought and likely to fall, at least a little bit. With Nucor, the RSI has fallen from it's swollen numbers back to a more reasonable 65. But, looking at the 65 along with the very high positive number of the MACD as well the the stochastic starting to come back down to under 80, it's likely in the short term the stock will fall a bit farther. However, with all that taking place the 50 day moving averages have recently crossed over the 200 day which is a bullish pattern. That happened back in September and has continued to rise which is a good indicator of a positive trend. Overall, there may be a better buy point in the near future, but long term Nucor can continue to post gains as long as they can keep their costs within a reasonable level.

STLD Steel Dynamics, Inc.

     Steel Dynamics is another company that has been able to keep control of their costs. This stock is traded on the NASDAQ instead of at the New York Stock Exchange. STLD has very similar products as Nucor and has seen the same reaction in stock price over the last month and a half. The company is headquartered in Fort Wayne, Indiana.

Like we will likely see with the rest of the charts I post, this one is overbought as well. Based on the three indicators that I'm looking at the price will likely go down in the future. The RSI can come down without a huge impact on the stock price, though. If it stays relatively flat for long enough, or sees a small dip, the technical analysis can look a little bit better. We may see that in the future the stock price using the 50 day moving averages as a floor for it to bounce off of. That same thing happened in September and into October and if people slow down with their buying or Trump says something harmful [more likely] we could see a decline to the moving averages.

AKS AK Steel Holding Corporation

     AK Steel Holding Corp is located in West Chester, Ohio. They manufacture a lot of their steel for the automotive industry as well as appliances and manufacturing as a whole. Over the last couple months they have revised their earnings estimates positively from about 6 cents to 8 cents a share. Also they revised their yearly EPS one cent to 33 cents per share. The board and the company is obviously bullish on their output and production and think they can benefit greatly from this boost in the industry.

Zacks ranks the steel industry within the top third of all industries as they believe they are in a position to grow. Starting to feel like deja vu, but the chart in the near term makes it seem like the stock is overbought and inflated. As I type this, it's up 1.21% to $10.83 which indicates people are still buyin! It's hard to say how big the correction will be, IF there is even one at all.

WOR Worthington Industries, Inc. 

     Worthington Industries had their earning call last week and it disappointed a lot of people. They stock fell considerably last week, almost 11.00%. In the daily chart, the stock price fell below the 50 day moving average and is a bearish sign.

Because of the earnings disappointment and drop in price, the chart looks a bit different. It has come down from an RSI over 70 and the stochastic over 80 to more reasonable, but still downtrending, levels. It's down further yet this morning and may need a boost from the industry to keep it rising. I remember reading IBD (Investor's Business Daily) and seeing WOR in their top 15 stocks. I'd be interested to see if they downgraded it a little bit based on the slow sales report. Over the long term this company has performed the best in the industry so they know what their doing and how to recover. Worthington Industries is based in Columbus, Ohio.

ROCK Gibraltar Industries, Inc.

     Gibraltar Steel has a residential products segment that is their largest. They have roof and foundation ventilation products including solar powered units. Yesterday, or maybe the day before, and article came out saying that 2016 was the first year that solar power was cheaper than nonrenewable resources and 2017 could see the new gap continue to increase. If Gibraltar has a hand in manufacturing solar panels then this could be a good year for them. I didn't see it written anywhere that it will have any effect at all on the company, it's my own hot take with limited knowledge on the subject. ROCK is headquartered in Buffalo, New York.

The chart is a little more inviting than the previous. Besides the MACD, Gibraltar has come down to being hugely overbought to being moderately. It seems like they could be starting a downtrend, but since they are up 1.05% today and the industry is still rising in general, I don't see that happening. I could even argue that the last candlestick pattern is a hammer. And you know how I loooooove the hammer.

RS Reliance Steel & Aluminum Co. 

     Reliance operates simply as a metal services company. They manufacture and sell 100,000 or so different metal products. Most of what they do is cutting, leveling, sawing, and electro polishing. They operate through about 300 locations in 39 states and a number of countries. They are headquartered in Los Angeles, California.

This chart is different simply because this company hasn't been bought up to the point of overbought. It rose with the presidential election like most others and may have formed a hammer last week. It isn't textbook and an argument can be made against it, but since there is no one here to argue with me then it's a hammer god dammit! Based on the companies last stock price dip it could use the 50 day moving averages as support moving forward which would indicate an upward trend.

XME (This is an ETF) Metals and Mining ETF

     This is a metals and mining ETF which has been benefiting greatly from the flow into steel. The expense ratio on this ETF is 0.35% putting it in the average range of costs. The funds top holdings consist of...

A few of the stocks I will be watching that I included in this blog are positioned highly in this ETF. 

A couple things to note looking at this chart. First of all, same as most of the others, overbought, blah blah blah. Second, the price of this ETF just jumped up over the 200 day moving average which we could start seeing as a nice support for the price. And THIRD, the 50 day moving averages are creeping up to the 200 day and in the next month or two could cross above it. [Golden Cross]. This would be a good option for someone who is confident in the steel industry as a whole and doesn't have the money to invest in 4 or 5 companies by themselves. 

     Another thing to keep in mind. A lot of these companies will either post better earnings, or as expected but better future guidance with Trump in office. Those things could also boost earnings a bit.

     Alright wow China has so much to do with the US Steel market. They are the world leader in exports. Usually they determine the floor price of all steel. With their rising middle class the production of steel and demand for steel in China has been very high. Some experts are saying that we won't see the same demand of steel in China and thus the prices are going to drop. Others are saying since China only gets 2% of their steel from US manufactures it won't make a huge difference. Plus, Trump has said he wants to renegotiate trade policies with China and imports from them will be taxed, so US steel would have to increase their production to keep up, increasing costs. AND the Trump administration, with the increases in domestic manufacturing, will need more steel for the actual building of infrastructure. I will say I am biased though. I am inherently bullish and when I read something I remember the positive parts better than the negative. If steel and iron is a sector that you're interested in then I recommend going out and looking up the sector and companies on your own. There are a lot of great articles connected to the company if after you look them up, you scroll down on finviz that will give a lot of insight to the company as well as the industry as a whole.

If the steel industry is something you're seriously interested in, then you should read this article by Mark O'Hara.  I read it and there is so much information that I'm on overload a little bit. It's a 15 part article (short parts) and it's phenomenal. Worth the time.

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