Top Down vs Bottom Up - STLD Added

Let’s add Steel Dynamics - STLD - $131 to the Model 25 portfolio and sell AES - AES - $11.

This is purely a top down decision. I prefer to make 90% of my selections for bottom up reasons. The recent additions of Pepsi and Gentex were “perfect” bottom up selections. The stocks just got too cheap, it was time to buy them. They were near 10-year lows.

The reason to buy STLD is because it looks like the BBBill will pass soon, and my portfolio could use one more cyclical stock. There are lots of great pro-growth parts of the BBB. I am no Trump supporter, but I am a fan of “Kudlow” economic ideas. The chances that economic growth in 2026 could be far higher than expected are now significant.

I had been worried about technical issues preventing the BBB from passing, but Trump is on roll, and they just might decide to fire the Senate parliamentarian.

When I listened to the STLD first quarter call I just got too excited to go to sleep not owning this stock. I just love companies that are willing to make significant capital expenditures to back up their ideas. STLD is finishing a major cap ex cycle and there could be more to come. STLD has a chance to remake the aluminum industry the way Nucor - NUE - $131 remade the steel industry in the US.

At the same time STLD has bought back 40% of their stock over the last 10 years, and kept the balance sheet clean. They just did a decent refinance in March, and near term debt maturities are manageable.

I prefer to buy stocks closer to their lows, but sometimes when you make top down calls there is nothing to choose from. I considered Century Aluminum - CENX - $21, Alcoa - AA - $28, and Kaiser Aluminum - KALU - $81, but STLD is a much better company. Maybe Nucor is a better pure steel play, but STLD has more aluminum exposure.

I think Wall Street badly misunderstands STLD. On the last call, the analysts asked a dozen tedious questions about next quarter’s results. And then came a voice from heaven, the old Paine Webber steel analyst John Tumazos (he now calls his firm Very Independent Research) asked exactly the right question. When was the last time anyone built a large flat rolled aluminum plant in the US? The answer is 1961. Let’s have a parade for Mr. Tumazos. The other analysts should be arrested for criminal negligence for their short-term focus. Please remember that last sentence was hyperbole, but I want to drive home the point that STLD is misunderstood. I think the Street estimate of $12 for STLD in 2026 is far too low.

Making steel and aluminum from scrap is a “spread” business. It is not as risky as Wall Street perceives. The risk is not the downside, it is missing the upside.

I was interested to see my friends at Victory Capital add 2 million shares to their 5 million share position last quarter. I am gaining respect for the value choices of the Norwegian sovereign wealth fund Norges Bank, that started a new 3 million share position in STLD. T Rowe Price also added 1 million shares, to an already large 7 million share position.

It does seem a little crazy to add a “risk on” stock with the market reaching new highs, but I still have plenty of defensive stocks. I could wait for a “dead cat” bounce in AES, but I am beginning to fear I do not understand the effects of the BBB on Biden era solar expenditures.

Every rule has its exceptions. 90% bottom up means there can be exceptions. STLD has been a slight under-performer for the last year. STLD has already warned the second quarter will be a little light. I have waited long enough. If we are going to rebuild American manufacturing, we will need the products STLD makes. The whole tariff scheme is designed to allow STLD and Nucor to make money.

I will go back too bottom up investing tomorrow. Merck is next on my list, but I want to examine a few other healthcare names first. Right now I am going to go play with my shiny new toy.

risk on (9) - RXO, Steel Dynamics, Brunswick, Thor, Gentex, Teck, Middleby, Nexstar, Chart

neutral - (8) - Halliburton, Matador, Iridium, Restaurant Brands, Sinclair, Darling, Red Rock, Rayonier

defensive - (8) - Pepsi, Sysco, Corteva, Nutrien, Tyson, Royal Gold, Kinder Morgan, Alexandria, (and maybe Merck)