United States Steel Corp. (NYSE: SLX) and AK Steel (NYSE: AKS) are two of the best-performing members of the S&P 500 this year and that has helped make the VanEck Vectors Steel ETF (NYSEArca: SLX) one of 2016’s best-performing industry exchange traded funds. SLX is higher by nearly 68%.
Since the start of March, U.S. steel has been gaining ground when Congress passed a new customs and trade enforcement bill that allowed the Obama administration to take action against Chinese dumping. The Department of Commerce imposed a 265.79% tariff on Chinese steel, according to the Wall Street Journal.
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While SLX and steel stocks have had the wind at their backs this year, that does not mean analysts are ready to forecast a slowdown for the group. In fact, some sell-side analysts remain bullish on some of SLX’s marquee holdings.
“While we remain concerned that U.S. Steel may de-rate on peak earnings as spot steel prices normalise in the coming year, the company deserves credit for recent cost performance, and U.S. Steel’s earnings trajectory may see more sustained upside as longer-term contracts reset into 2017. Reflecting U.S. Steel’s reduced balance sheet risk following debt refinancing and a potential bottoming of loss trajectory in Tubular, we value U.S. Steel at its mid-cycle 5.0x EV/EBITDA, implying $24.50 fair value,” said Jefferies in a note posted last Friday by Barron’s.[related_stories]
Jefferies raised its rating on U.S. Steel, an SLX holding, to hold from underperform.
The steel industry is also strengthening from measures taken by the Commerce Department to reduce the supply of cheap Chinese steel imports, which have contributed to the lingering low prices. The commerce Department imposed a 266% tariff on Chinese cold-rolled steel imports and prices have rallied roughly 21% over teh past two months reports James Passeri for TheStreet.
Jefferies is also bullish on a foreign steelmaker, Arcelormittal (NYSE: MT), which is SLX’s third-largest holding.
“Play Euro momentum via ArcelorMittal. While US prices have peaked, we see opportunity for an attractive catch-up trade in the Euro market moving into 2017 brought about by emerging protectionist trade policy and consolidation. ArcelorMittal is best leveraged to this momentum,” said Jefferies in the note posted by Barron’s.
VanEck Vectors Steel ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.