Steel stocks get red hot

Strong data out of China, confirming a global economic reacceleration, push metal stocks out of a long consolidation.

By Anthony Mirhaydari Aug 9, 2013 2:20PM

A red-hot steel sheet being rolled in a steel mill (copyright Photodisc/Getty Images)Earlier this week, I lamented that while we're looking at the best rebound in the economy since 2011, Wall Street is bailing out of stocks on fears of the Federal Reserve's plans to "taper" its stimulus next month. I pulled back, and recommended investors do the same.


Now, while the Dow continues to move lower, there are signs that parts of the market are waking up to the turn underway in manufacturing activity -- here at home, in Europe, and in Asia too -- and are moving into the stocks that will benefit most. Stocks like steelmakers, which have been beaten down and forgotten since early 2011.


Here's why.


Overnight, China reported that industrial production in July increased nearly 10% over the last year -- above expectations of a 9% jump. Motor vehicle production increased 15.4% vs. 13.5% in June. Machinery was up 10.6% vs. 8.1% while cement output jumped 9.1% vs. 8.8% in June.



Anecdotal evidence also suggests a rebound is underway. Look at electricity output, as highlighted in the chart above from Capital Economics.



And all of this comes in the context of a global resurgence, especially in Europe where countries like Spain are exiting recession as shown in the chart above of Spain's Manufacturing PMI measure. 



In response, while maintaining a more neutral portfolio positioning, I'm adding back steel sector exposure to my Edge Letter Sample Portfolio via the Market Vectors Steel ETF (SLX) as well as AKSteel (AKS) and Mechel Steel (MTL). I sold Cliffs Natural Resources (CLF) earlier in the week, after adding it in late July, for an 8% gain. I'm also selling the UltraShort Emerging Markets (EEV).


All this said, the major U.S. averages are still looking weak. So, for conservative investors, maintain a cautious footing while, perhaps, nibbling a little on these steel names.


Disclosure: Anthony has recommended SLX, MTL, and AKS to his clients. 


Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​om​​​​​​​​​​​​​​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

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Aug 9, 2013 11:17PM

While steel stocks may seem appealing, how long does that wave last? The last 4 years, with recession lingering into a recovery, the steel recycle business thrived. China has bought our old U.S. premium junk steel at relatively cheap prices in consideration of the price per foot verses the cash in per pound. The overnight sensation of scrapers, because of the uptick in recycle steel per ton, has helped many individuals find a source of income( including 2 loads myself @ $150 a ton) to make ends meet. Even the criminal activity of grabbing un-tied down bundles of copper, unattended scrap iron on rural properties, and various other thief's have skyrocketed to new levels.

 From this angle, what's the bottom line, or in this case the Hard Line of steel. Researching China's output, verses demand of their steel, seems to point in the direction of next years pricing of recycled steel and imported steel to start to drop. China has bought so much imported salvage steel that this price drop should rattle the metals market in the near future. If you have some scrap the time to sell it off is NOW!

Aug 9, 2013 5:28PM
There`s better places to put your money.
Aug 11, 2013 11:12PM

You are too late! Steel prices are headed back down again. The economy although improving is not strong enough to keep the high prices afloat. The mills will do anything to strengthen their position but it rarely lasts for long. Look before you leap!


Aug 10, 2013 8:29PM
The really big question is if the US economy is only growing at 2% after 4 years of huge deficit spending and Fed money printing what will happen if the Fed and US government have to pull back. We could be in the next recession by 2015.
Aug 11, 2013 12:57PM
My brother is in steel directly. He's retiring. He just told me that any news suggesting "red hot" is not. Apparently there's a GOON not a GURU hanging out with Anthony these days, telling him to pump a bunch of dead stocks or else. QE ends in weeks, so does the entire scam that is the financial sector. Invest in family-sustaining jobs and you get an infinite return you can be proud of. The rich are about to be processed into bullburger and fed to poor nations like America. History will know you as the worst Humanity has ever squeezed out of a womb.
Aug 12, 2013 4:15AM
With low interest rates for years to come and new home sales on the rise, the wood industries would be a better bet.
Aug 11, 2013 6:47PM
Aks is a very very good buy. I know because I worked there for almost 40 years.
Aug 10, 2013 8:17PM
doom and gloom is  no place  for stocks better left to the big at heart
Aug 11, 2013 6:51PM
Some people never see any good in anything, they will never have a brighter future.
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