Yesterday, a sharp and sudden sell-off for U.S financial stocks led the S&P 500 to decline more than 1% for the first time since Oct 2016. The S&P 500 financial sector sub-index was down 1.6%, marking its biggest single-session decline since mid-January as uncertainty over Donald Trump’s economic policies and the outlook for interest rates cast a shadow over the Wall Street.
The Dow Jones Industrial Average lost 237.85 points or 1.4% while the NASDAQ Composite lost 107.7 points or 1.8%. The biggest weakness was witnessed in small and midcap companies. The S&P Small Cap 600 Index, that roughly covers the small-cap range of U.S. stocks, sank 2.6% and the S&P MidCap 400 Index, a barometer for the U.S. mid-cap equities sector, fell 1.9%. The Russell 2000, a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index, dropped 2.7%, negating all of its year-to-date gain. It was the biggest one-day drop for all three indexes since Sep 2016.
The CBoE Vix volatility index, that measures the predicted volatility of the stock market over a certain period in the future and is considered as a gauge of stock market stress, was up 14.29% at 12.96.
As equities tumbled, US Treasuries rose sharply. The yield on the 10-year U.S. note, which moves inversely to its price, was down to a three-week low of 2.42% and the short term two-year note yield dipped to 1.26%. Yields have been falling ever since the Fed maintained a conservative stance on rate-hike outlook at its meeting. Weaker yields lead to lower interest rates on loans, which in turn hurt financial stocks, particularly banks. Meanwhile the dollar fell to four months low. The euro is flirting with its highest level in the year compared with the weaker dollar amid easing concerns about the Eurozone’s political climate.
What Triggered the Sell-off?
The market, which so far enjoyed a nearly 10% gain since President Trump’s win, succumbed to growing concerns that Trump’s pro-growth policies could take longer to implement as well as the uncertainty over the future path of interest rates. Traders worry that the fight to get a Republican health care bill through Congress will delay other economic agendas such as cutting corporate taxes and passing an infrastructure spending bill.
Steel Industry Shows Resilience
One of the industries that particularly gained from Trump’s infrastructure spending promises was the steel industry. The industry gained 20% since the election as is evident from the chart below. This was driven by the expected increase in steel demand as it is a key component in many infrastructure products. Moreover, Trump’s aggressive trade policies are anticipated to provide more protection to the U.S. steel industry. Trump, during his presidential campaign, repeatedly threatened to impose a 45% tariff on Chinese imports into the U.S.
However, if the market fears are proved true or in other words, Trump fails to deliver on promises, we believe the steel industry will still keep the momentum given its strong fundamentals.
One of key factors that contributed to a rebound in the steel space is positive outcome in a number of trade cases that led to a decline in steel imports. Further, higher costs of steel-making inputs such as iron ore and coking coal are working in its favor. China has pledged to cut steel production capacity by around 50 million metric tons in 2017. The country’s sustained efforts to eliminate excess capacity should support to steel prices in 2017. More importantly, the continued momentum in the automotive space and a recovery across housing, and commercial construction markets have been other tailwinds for the steel industry.
Favorable Industry Positioning & Attractive Valuation
The bullish Zacks Industry Rank of 20 carried by the Steel-Producers industry is a testimony to the fact that steel stocks are back in favor. The favorable rank places the industry in the top 8% of the 250+ groups enlisted.
Moreover, valuation also looks attractive for the steel industry. Going by the EV/EBITDA multiple (a preferred valuation metric for cyclical industries like steel) steel stocks appear inexpensive at this point. The industry has a trailing 12-month EV/EBITDA multiple of 8.15, which compares favorably to the S&P 500 EV/EBITDA multiple of 10.99. The industry’s lower-than-market positioning calls for some more upside moving ahead.
The Zacks categorized Steel-Producers industry has also outperformed the broader market in the past year. The industry has gained around 60.9% in this period, much higher than the S&P 500’s increase of 18.6%.
4 Steel Stocks Worth Considering Now
As the fundamentals remain strong for the steel space, it would be a prudent idea to invest in steel stocks that have compelling prospects and are well poised to run higher leveraging improving steel market conditions. We highlight the following stocks, armed with a Zacks Rank #1 (Strong Buy) or 2 (Buy), and are worth considering for investment right now. You can see the complete list of today’s Zacks #1 Rank stocks here.
United States Steel Corporation X
Pittsburgh-based U.S. Steel sports a Zacks Rank #1 and has a VGM score of A. Here V stands for Value, G for Growth and M for Momentum. United States Steel’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners.
The company has long-term earnings per share (EPS) growth rate of roughly 8%. The company delivered a positive average earnings surprise of 630.61% in the trailing four quarters. The stock has soared 118.5% in the past year, outperforming the Zacks Categorized Steel-Producers industry’s gain of 56.6% in the same period. The Zacks Consensus Estimate for fiscal 2017 has gone up 5% in the past 30 days and is currently pegged at $2.68, reflecting a year-over-year growth of 267.50%.
Luxembourg-based ArcelorMittal, carrying a Zacks Rank #2 and a VGM Score of A is also another good pick. The company has an expected long-term EPS growth rate of roughly 10.9%. It has delivered an average positive earnings surprise of 143.80% in the trailing four quarters. The company's earnings estimate for 2017 has improved by 3% in the last 30 days and is currently at 77 cents, reflecting a 60% year-over-year growth. ArcelorMittal’s share price has advanced 101.6% in the last one year, outperforming the Zacks Categorized Steel-Producers industry’s gain 56.6% over the same period.
Ternium S.A. TX
Based in Buenos Aires, Argentina, Ternium is another attractive choice with a Zacks Rank #1 and a VGM Score of A. The company has an expected long-term EPS growth rate of roughly 18.4%. It has delivered an average positive earnings surprise of 16.4% in the trailing four quarters. Earnings estimates for 2017 have also improved by 10% in the last 30 days.
Posco manufactures and sells steel rolled products and plates in South Korea and internationally. It carries a Zacks Rank #1 and a VGM Score of A. It has an expected long-term earnings growth of 5%. Its earnings estimate for the current year has increased 3% in the last 30 days to $4.15, depicting a whopping 888.10% year-over-year growth.
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