Why Steel Is Up

I had a reader ask me earlier why steel stocks were doing well today. Several of them, such as US Steel (X), Nucor (NUE), and AK Steel (AK) just announced their earnings in the last couple of weeks where they warned of slowdowns in their business. They've all been doing their best to reduce costs.

The reason for the rise today is that the shippers are doing well, as is Coal, as is Ag, as is Energy. James River Coal (JRCC) annouced a great quarter this morning (up 24% today now) and we also had the postive news from DryShips (DRYS). It's a commodity day today.

Stepping back, even with the steel companies' cautious comments, basic materials have taken a huge hit in the last 6 months. They are going to participate better than the market, as the economy shows further evidence of stabilization and then growth. Once true inflation kicks in from current Fed policy, that's when you should really expect commodities to fly.

I like all these parts of the materials sector, including steel, to do well this year. However, I tend to favor smaller stocks like AK vs. big integrated companies like Arcelor-Mittal (MT) or X. The scrap steel providers like Schnitzer (SCHN), Steel Dynamics (STLD), and Metalico (MEA) will move later than the steel companies as they are further downstream. I like MEA a lot from here as it hasn't yet full participated in the rally of the last few weeks.

Position: Long MEA.

Originally published in RealMoney.com on 5/1/2009 3:01 PM EDT

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Metalico (MEA) is Due for a Rebound

Metalico (MEA) is a scrap steel provider in New Jersey and Upstate New York. Last June, this was almost a $20 stock, with a large institutional following. It hit $1.15 as a low in November, as investors disgorged commodity stocks in general -- with scrap steel seen as being even more downstream than the steel stocks themselves, making them even less desirable.

This morning, Metalico announced a debt-for-equity swap with some of their creditors to reduce the company's debtload by $10mm, taking it down to approximately $175mm. Their cash balance is around $63MM. This should provide a modest boost to the stock this morning as we've seen with other leveraged companies in this environment.

Another reason to look at the stock is that is has lagged the rebound of other scrap steel providers such as Schnitzer Steel (SCHN) and Steel Dynamics (STLD) over the last 6 months by 110% and 40% respectively. It's another baby-with-the-bathwater stock that is due to rebound (although it sports a higher Enterprise Value to EBITDA ratio than the two other scrap steel companies).

Please note that due to factors including low market capitalization and/or insufficient public float, we consider MEA to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Position: Long MEA.

Originally Published in RealMoney.com on 4/24/2009 8:59 AM EDT

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