4 Steel Stocks to Strengthen a Portfolio

Soleil's Bradford says most of the sector is ahead of itself. He says shares are trading as if there were still a consolidation boom happening, with speculation pushing up share prices even among the largest names like Nucor and U.S. Steel.

CIBC World Markets says there's room for higher earnings this year, but it warns against buying steel stocks trading at a price above 10 times their projected 2008 earnings. Prices could also pull back more than expected if already dismal automotive demand continues and sales of gas-thirsty and steel-heavy SUVs brake hard.

Still, with earnings accelerating, the next few quarters look generally rosy for the sector.

Here are four investment ideas—one sterling, one dynamic, one cheap, and one with a bit of a tech bent—to consider in the booming sector.

United States Steel
Is there a company with more all-American cachet or a better comeback story than U.S. Steel? After surviving the wave of bankruptcies in the early part of this decade, U.S. Steel has been reforged as an industry leader. Its shares are up 44 percent this year after a spree of acquisitions that leave the company with both a solid competitive position and some unheralded mining holdings that give it a big advantage in keeping production costs down despite rising raw material prices. "What's really differentiated U.S. Steel is its North American mining business," Parr says. On Tuesday, Deutsche Bank upped its price target from $165 to $220. Shares are trading around $175.

Steel Dynamics
The name might be apt. The stock has lagged behind U.S. Steel a bit, but the company is beating higher costs, thanks to a large scrap-metal processing component it acquired last year when it paid $500 million for Recycle South, a scrap recycler in Spartanburg, S.C.

"If I was buying one steel stock today, I'd probably be buying Steel Dynamics aggressively," Parr says.

Soleil's Bradford agrees that Steel Dynamics is the "premier company in the group," with a low enough market share to continue making acquisitions where larger rivals might run into antitrust problems. Still, he says shares, trading at about $36, are a bit rich.

Commercial Metals
Bradford says this name is his only "buy" right now, given its underperformance compared with the rest of the sector. Its shares are up 25 percent this year (to about $36), even as the company remains one of a dwindling number of takeover candidates left standing. The minimill operator and scrap dealer has factories in Poland and Croatia and is less exposed to the U.S. slowdown. Earlier this month, UBS analyst Timna Tanners said the Irving, Texas-based company could be a good fit with Nucor or Brazil's Gerdau SA.

GrafTech
This company is not a steelmaker, but its fortune is being built on the back of the boom. GrafTech makes graphite electrodes used to make steel and aluminum in electric furnaces, which are gaining market share. The company languished for several years under the weight of lawsuits when it was part of Union Carbide. Now, GrafTech's products are finding a home in steel operations around the world and in emerging "green" areas, including the manufacturing of silicon solar cells and fuel-cell batteries. The stock has already had a huge run this year—up more than 60 percent since March—and trades above $26, near most analysts' estimates. Soleil's Bradford is among the more bullish, with a $40 price target on the stock.

"The best part is the environmental. Electric furnaces are lower cost and environmentally much better," Bradford says. "This is a green play."