Steel Stocks Have Had an Incredible Run. Why They’re Still Worth Buying.

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Updated Aug. 24, 2021 11:57 am ET / Original Aug. 24, 2021 11:20 am ET

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Steel prices, and steel stocks, have had an incredible run coming out of the Covid-induced recession. There is still room, however, for stocks to work higher. Seaport Global launched coverage of the steel sector Monday evening. Analyst Martin Englert see more gains for the sector before the good times end.

Benchmark steel prices are up about 87% year to date, to almost $1,900 a ton. Steel prices averaged about $600 a ton in 2019, the year before the pandemic.

The reason commodity prices are up isn’t a mystery. Reduced supply and better than expected demand coming out of the pandemic is the reason. U.S. steel production still hasn’t hit prepandemic highs.

High prices have been a boon for steel stocks. Nucor (ticker: NUE) shares are up 133% year to date. Steel Dynamics (STLD) shares are up 92%. Shares of United States Steel (X), Cleveland Cliffs (CLF) and Commercial Metals (CMC) are up 66%, 69% and 66% so far in 2021, respectively.

The high for high commodity prices, however, is high commodity prices, and the run up might make investors nervous that a dip in pricing is due. Englert doesn’t think it’s time to panic, though. “Prices are closing on peak, but [we] see an opportunity for better than expected [second half] results versus expectations,” wrote the analyst in his launch report. “More rapid input cost erosion relative to stubbornly high steel prices will drive solid results.”

Englert sees profit margins holding up as raw material prices — such as iron ore — fall. Iron ore prices in China are down about 20% over the past three months.

Englert has a Buy rating on Nucor and Steel Dynamics. His price target for those two stocks are $130 and $75, respectively. He doesn’t cover the other three steel producers.

The average analyst price target for Nucor is about $118 a share. The average analyst price target for Steel Dynamics is about $80.

He also has a Buy rating and $165 price target on Reliance Steel & Aluminum (RS). Reliance is a steel and metal products distributor. He rates shares of distributor and steel products producer Worthington Industries (WOR) Hold. He doesn’t have a price target for that stock.

The average analyst price target for Reliance is about $177 a share.

Nucor, Steel Dynamics and Reliance shares are up on the bullish call. Nucor stock is up about 2.8% to $123.16 in early trading. Dynamics shares have gained 3% to $71.04. Reliance stock is up 1.7% to 153.68. Worthington shares, however, are up by about 1.4%, to $59.42.

The S&P 500 and Dow Jones Industrial Average are both up about 0.2%.

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