Epicenter - STLD !!!?
Some time in the near future I want to add a position in Steel Dynamics - STLD - $126. The trick will be to find the right entry point. Let’s discuss how I arrived at this conclusion.
Right now what I want to do is produce a movie titled “Epicenter”. All I need is a script, cast, crew, a director, a few cameras, a distribution plan, and $100 million. Epicenter will be about the recent history of the steel industry. Maybe my flick will even feature a new John Galt. If you do not understand that reference, you have some summer reading to do. Start with “Atlas Shrugged”.
Both Nucor - NUE - $130 and STLD are at the very center of Trump’s economic plans. It is the NUE chairman that keeps using the word “epicenter” on his quarterly call.
The basic idea is that when world economic growth slows, cheap steel gets dumped into North America. Much of that dumping from places like China, Brazil and South Korea, ends up in Canada and Mexico. There is a complex system of quotas and trade agreements that nobody can understand. The dumped steel is made into parts that are then used to make stuff like boat engines, RV parts, and many other items. The dumped steel becomes a US import when the part crosses the border as a finished good. That is why Trump thinks we need tariffs on Canada and Mexico. It took me awhile to understand Magna International - MGA (the big auto parts company). Once you do, the tariff issue becomes clearer.
Nucor has been the workhorse is adding new steel making capacity in the US. The company’s story is epic, and should be a movie. At about 1.1x EV/Sales, NUE’s stock is not dirt cheap, but it is not that expensive either. But as we say in chess, “when you find a good move, look for a better one.”
STLD is the “better move”. STLD has been built by some former NUE executives. In many ways it is just a better NUE. Selling at just 1.25x EV/Sales, STLD is the better deal. STLD is building a new world class aluminum plant and has a better scrap acquisition operation than NUE. STLD has less exposure to rebar and other commodity grades. The balance sheet is pristine, even after buying back 30% of their once outstanding shares.
The STLD stock is up 800% in the last 10 years, as the chairman likes to tell you. In fact, at the end of the 4th quarter call he chided analysts for asking too many short-term questions. The STLD chairman was dead on correct. The analysts should be ashamed.
I want to own STLD, but timing is an issue. 4th quarter results were helped by buying ahead of proposed tariffs. There are still some issues with the new steel plant in Sinton, Texas. Auto sales, and commercial construction have slowed, and government spending may be disrupted. I am tempted to wait for the first quarter to be reported. I am still a cheap bastard, but I love this story.
In general I want to stay away from “battleground” stocks. I have stayed away from Boeing - BA - $181, even though they make good planes. There are just to many issues. In all my 40 years of value investing I have never recommended an auto maker. I glance at Ford - F - $9 every six months, and quickly run away. I only got involved in the General Electric battle at the very end. Maybe STLD is too close to the political firestorm. Maybe I should wait forSTLD to be 50% of sales, and operating rates of below 50% of capacity as they were in 2008-11. Or maybe the world has changed, and we will not go back to “the bad ole days”.
Here are some other steel/aluminum stocks I also considered.
Algoma Steel - ASTL - $8 - If you are a young, intrepid, value analyst you should spend the next two months trying to understand Algoma Steel. It could be a 10x bagger. Famed value investor Don Smith & Co. has owned 7% for awhile. Several other hedge funds have bought into this one time SPAC. This Canadian steel maker has a crazy history. I am just to lazy to dig in, because I have 30+ quarters to look at.
SunCoke Energy - SXC - $10 - This is another small cap that deserves a closer look. At book value and 70% of sales, I am embarrassed to say I do not have the time to dig deeper. You even get a 5% yield while you wait.
Warrior Met Coal - HCC - $52 - This might be the best way to play the new steel industry, I just need to do the work. Only 1.3x book, with little debt
Kaiser Aluminum - KALU - $71 - cheap stock, but maybe too much Boeing exposure
Cleveland Cliffs - CLF - $10 - iron ore miner, if I had more guts I might look here, but the balance sheet is a mess.
Worthington Steel - WS - $27. I am worried the new plants are doing there own galvanizing, but at 50% EV/sales this could still be a value
Alcoa - AA - $36 - They have sold the good stuff to Apollo, and kept the operations with too much China exposure.
Commercial Metals - CMC - $50 - too much rebar exposure, but a good recycling business
Carpenter Technology - CRS - $188 - A 20x bagger that I missed years ago because I was worried about pension issues. Part of industry rebirth story, but too expensive now at 3x EV/sales
Vale - VALE - $9. iron ore, waiting for the next dam collapse, dangerous guys
Radius Recycling - RDUS - $12 - the old Schnitzer Steel, I am glad to say I have avoided this stock for 30+ years, and so far that has been the right call. The balance sheet stinks.
Magna International - MGA - $39 - the more you look at MGA (the worlds largest auto parts maker), the more you understand the need for tariffs, and long-term possibilities for NUE and STLD.