'Unprecedented Steel Bubble': Here's How To Play It

Record U.S. steel prices have steel stocks soaring, but Bank of America analyst Timna Tanners said Wednesday the steel stock party won’t last forever.

Tanners recently did a deep dive on past steel price peaks and found a history of sharp drops in steel prices and stocks.

History Lesson: So far, Tanners has seen no evidence that U.S. steel prices have reached the current cycle’s peak given new capacity has been delayed until late 2021. Hot-rolled coil (HRC) steel prices recently ranged between $1,400 and $1,500 per ton, more than double their 10-year average of $641.

Prior steel price peaks in 2004, 2008, 2016 and 2018 suggest steel stocks will peak roughly a month before steel prices do, suggesting investors should be watching stock prices more closely than steel prices.

Related Link: BofA Upgrades Steel Dynamics, Nucor Amid Record Steel Prices

How To Play It: Tanners said past steel market corrections have hit higher-levered stocks hardest, which doesn’t bode well for United States Steel Corporation X. Instead, she prefers Nucor Corporation NUE and Steel Dynamics, Inc. STLD, both of which should be able to offset the negative impact of falling steel prices by ramping up capacity.

No matter what, Tanners said investors need to understand the risks in the steel space these days.

“A cautious and nimble approach is best navigating cyclicals late in the price cycle amid an unprecedented steel bubble, in our opinion,” she wrote in a note.

Benzinga’s Take: Record steel prices may not last, but both Nucor and Steel Dynamics appear to already be pricing in a pullback in steel prices at some point. Nucor shares trade at just 17.6 times forward earnings, while Steel Dynamics has a forward earnings multiple of just 13.7.