In September, I told you to
buy steel stocks.
At the time, steel was the most hated sector in the world. Flagship names like
U.S. Steel Corp. (
NYSE: X,
Stock Forum) and
AK Steel Holding (
NYSE: AKS,
Stock Forum) were down an average of 75% since early 2011. Those are brutal returns considering the S&P 500 was up 30% in the same time frame.
I told you that if these companies reported any good news, we would likely see huge short-term gains. And that's exactly what happened...
Since my essay,
U.S. Steel and AK Steel reported solid quarterly results. Plus, we've seen positive global economic data over the last few months. As a result, these two names have rocketed higher. Shares are up an average of 45% in two months.
After such huge returns, I would usually advise taking profits off the table. However, these stocks have much more upside.
Investment firm Goldman Sachs agrees. Last week, it sent out a report to its largest clients titled: "Steel Demand Headed to Solid Sustainable Recovery – Upgrade from Cautious."
As I mentioned in September, the world had been stuck in a recession, which created less demand for houses, construction, and cars – the major end markets for steel.
But markets around the world are starting to grow again. Europe is on much better footing today than one year ago. China is starting to see a rebound as well. Last month, its Purchasing Managers Index, which measures manufacturing activity, hit a seven-month high.
And the U.S. auto market – one of the largest end markets for steel – is on fire. Industry analysts project over 15 million cars were sold in October. That's close to a six-year high.
Based on this data, steel stocks had nowhere to go but up. Remember, in September, they were trading near 2009 lows. And back then, we had a credit crisis and a worldwide recession.
Goldman talks about these catalysts in its upgrade. The firm also mentions utilization rates. Utilization rates measure the rate at which current output levels are being used to meet demand. For example, if a company is running at 60% capacity, it has room to increase output if demand picks up.
From 1998 through 2008, steel companies' utilization rates averaged 85%, according to Goldman. Today, they sit at only 77%. So as demand continues to increase, these companies will boost utilization, which will turn into future profits.
Goldman brings up another interesting catalyst... something I've mentioned several times in
Growth Stock Wire. Low natural gas prices are creating
huge demand for new liquefied natural gas (LNG) export facilities. These projects use massive amounts of steel.
On a final note, we are still seeing governments around the world do everything in their power to inflate the markets. This includes buying government bonds, easing lending rates, and keeping interest rates at historic low levels. As economies around the world start to inflate, there will be more construction products, cars being built, and housing projects – creating more demand for steel.
In short, there are numerous tailwinds that should push steel stocks higher. I recommend holding U.S. Steel and AK Steel for at least another six to 12 months.