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What: Nucor Corporation's stock pulled out a one-month gain of 20% in March. That's an impressive showing, but actually kind of subdued for the steel industry.
So what: It's hard to complain about a one-month advance of 20%, unless other industry players saw jumps of 44% and 75%! Those gains came at AK Steeland US Steel, respectively. So, two questions: Why the price jump in the steel industry? And why was Nucor the laggard?
The steel industry has been in a funk since the 2007-to-2009 recession. The big problem has been slowing demand at the same time increasing supply has come on line, particularly in China. That supply/demand imbalance has done exactly what you would expect and pushed prices lower. However, in the past couple of months there have been some positives for the American steel industry.
For example, while prices were plummeting, foreign competitors were selling steel in the U.S. market at cut-rate prices just to get rid of it. That put extra pressure on U.S.-based mills. However, the United States has been imposing tariffs on steel imports it considers abusive. That's helped some, but the tariff wins are more about setting the stage for the recent steel price increases that have really benefited the industry and the stocks of the companies within it. After watching prices decline for so long, the recent pricing strength, though far from a rebound, is very welcome news.
So why the steel-sector rally? The moribund industry is starting to see some positives take shape. But why has Nucor lagged behind the rally?
The steel downturn since the recession has been long and deep. AK Steel, for example, has lost money each year since the end of the recession. That's seven straight years of red ink. Nucor, however, has lost money only once over that span, in 2009. Nucor is simply one of the best-run U.S. steel mills. That helps explain why Nucor's stock is up roughly 3% over the past five years and AK Steel's stock is still down nearly 75%, despite the recent rally. Put another way, Nucor's stock has far less ground to make up than more troubled mills such as AK Steel.
Now what: If you're looking at the U.S. steel industry, Nucor is probably one of the best companies around. That said, the market clearly knows this. That doesn't mean there isn't upside potential for the mill as the industry recovers from a deep downturn, but rather that the gains will probably be muted relative to peers that got hit harder during the falling market. If you're looking for a long-term holding in a vital industrial market, Nucor is a fine choice. But if you're looking for big gains from an industry turnaround, higher-risk fare such as AK Steel and U.S. Steel will probably provide you more bank for the buck -- just tread carefully.
The article Why Nucor Corporation Stock Advanced 20% in March originally appeared on Fool.com.
Reuben Brewer owns shares of Nucor. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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