A contrarian play in steel

At least one ETF is now a good deal for long-term investors.

By TheStockAdvisors Oct 12, 2011 2:21PM
Image: Nuts and Bolts © Andrew Bret Wallis/Photodisc/Getty ImagesBy Mark Salzinger, The Investor's ETF Report

We are adding the out-of-favor Market Vectors Steel ETF (SLX) to our Contrarian Portfolio.

Even if we see S&P earnings fall 10%, 20% or even 30% from recent levels, I suspect that investors who scoop up shares now of excellent stock ETFs -- such as SLX -- will be glad they did several years from now.

Slowing economic growth has tempered expectations for steelmakers, and their prices were savaged in early August 2011, losing nearly 15%.

For the year through Aug. 31, Market Vectors Steel is down about 23% despite a 10% rebound off its low point in mid-August.

We think this steep decline overly discounts steelmakers' prospects and provides an attractive contrarian opportunity in SLX.

Despite the drop in steelmakers' share prices this year, steel shipments have risen strongly. U.S. and Canadian companies together shipped more than 3.5 million tons of steel in July 2011, up 9% over July 2010.

July's shipments boosted totals for 2011 to 27.6 million tons, an increase of 16% over the same period in 2010.

Prices and overall profitability have improved from their nadir in 2009. Higher prices and profitability have come largely from demand in emerging markets, which consume 80% of the world’s steel.

Non-residential construction remains depressed in the developed world, but in emerging markets (like Brazil, which is building out for both the upcoming World Cup and Olympics) remains robust.

Still, this year’s profits will be far short of 2008’s $13.5 billion, a peak level that was juiced by a shortage of both finished steel products and inputs.

With the rebound in profitability, nearly every major steel company has invested heavily in both expanded production and raw materials (including metallurgical coal and scrap steel).

SLX invests in 27 of the world’s largest steel makers, fabricators and iron-ore producers through shares listed on U.S. exchanges.

U.S. and Canadian companies make up about 36% of the portfolio, followed by Europe (33%), South America (23%) and Asia (7%).

About 25% of the portfolio is in mid-cap stocks, mostly specialized U.S. fabricators, but the largest companies dominate; nearly 70% of the portfolio is in the top 10 positions. SLX levies a 0.55% expense ratio.

The sell-off in steel-related shares seems to discount a large decrease in demand. Many of these companies are in excellent financial health.

In addition, the biggest companies have made savvy moves to better control their input costs and diversify their geographical exposure.

With a mild valuation and underestimated potential, SLX looks attractive at recent levels.

TheStockAdvisors.com​​ is a free website that highlights stock recommendations and market commentary from leading financial newsletter advisers.

Related articles
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

114
114 rated 1
278
278 rated 2
474
474 rated 3
641
641 rated 4
639
639 rated 5
663
663 rated 6
640
640 rated 7
499
499 rated 8
284
284 rated 9
122
122 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
COPCONOCOPHILLIPS9
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
KOGKODIAK OIL & GAS Corp9
CVXCHEVRON CORPORATION8
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.