These Steelmakers Deserve A Place On Your 2023 Watch List

It’s not the warmest or most cuddly holiday-season image, but steel stocks, including Nucor Corporation NYSE: NUE and Steel Dynamics Inc. NASDAQ: STLD, are bringing some cheer to investors.

As a group, steelmakers have been rising quickly, led by those two S&P 500 components, along with Belgium-based large-cap Tenaris S.A. NYSE: TS.

What’s behind the outperformance? As with many other year-end standouts, including heavy machinery makers and solar energy stocks, you can chalk it up to high expectations due to the Infrastructure Investment and Jobs Act, which was signed into law in November. 

That law allocates government funding for construction projects, including roads, bridges, transit, ports, airports, rail, broadband, and drinking water and wastewater infrastructure. In other words, plenty of work ahead will require steel. 

Charlotte, North Carolina-based Nucor is down 10.02% in the past month but still boasts a year-to-date gain of 21.25%. Despite the decline, shares found solid support above their 200-day moving average, signaling that institutional investors are holding shares at the level rather than bailing out. That’s an indication of confidence about the stock’s future prospects. 

Disappointing Earnings Guidance

Much of the recent price decline was due to a December 15 announcement that Nucor was lowering its earnings guidance for the current quarter. It now expects fourth-quarter earnings between $4.25 and $4.35 per share. It added that full-year earnings remain “on track to exceed the record of $23.16 per diluted share Nucor set in 2021.”

Nucor’s price-to-earnings ratio of 4 is in value stock territory at the moment, which isn’t necessarily a bad thing, considering that value stocks, over time, tend to outperform growth. 

MarketBeat analyst data show a “hold” rating on the stock. In the third quarter, the company warned of challenges related to lower product shipments; sentiments echoed in the December warning. 

Despite some gloom in recent months, the passage of the infrastructure bill may lead to better-than-expected results in 2023 and beyond. New construction and clean-energy initiatives will create demand that’s not yet quantified. And certainly, institutional investors have shown they are willing to hold shares at levels that outpace the broader market. 

Meanwhile, Steel Dynamics has also declined recently, pulling back 3.37% in the past month, but maintaining a year-to-date gain of 67.34, outperforming the S&P by a wide margin. 

Added To S&P 500

Steel Dynamics, which has a market cap of $18.08 billion, was added to the S&P 500 on Thursday. It replaces Abiomed, which was acquired by Johnson & Johnson NYSE: JNJ in a deal that closed Thursday. 

Index inclusion can boost a stock because funds owning the stock must purchase enough shares to match index weightings. 

Shares rallied to an all-time high of $113.12 on December 13 before gapping down two days later. Like Nucor, Steel Dynamics issued guidance for the current quarter on December 15, and investors didn’t like what they heard.

The Fort Wayne, Indiana, company expects earnings between $3.34 and $3.38 per share, which includes the impact of several special items. 

Strong Order Backlog

In a sign of resilience and optimism about 2023, the company expects a strong order backlog from non-residential customers to continue next year. 

Steel Dynamics shares are getting excellent support at their 50-day moving average. That was the case even before the announcement about the company joining the S&P 500. 

Analyst data compiled by MarketBeat show a “hold” rating on this stock. 

Coincidentally, Steel Dynamics, like Nucor, has a P/E ratio of 4, suggesting that if the company sees increased revenue from infrastructure and clean-energy projects, there could be significant room to run. 

While Wall Street analysts are not going overboard with enthusiasm about either stock, institutional investors are telling a different story with their support. As infrastructure projects are funded over the coming months, these large steelmakers are worth keeping on a watch list.