The company traded near $40 in 2007 and in the high teens just last year. If Alcoa Inc (NYSE:AA) can keep its business profitable through this cyclical lull, an $8 share price (today) might end up being a bottom, or even a generational low.
Steel Dynamics, Inc. (NASDAQ:STLD)
Steel Dynamics has also managed to turn positive earnings on cost reductions and operational efficiency, but in fairness it’s been far more reliable a performer than Alcoa. The two companies are in a similar position, though, as their metal markets are set for rebounds–steel especially. Compared to competitor U.S. Steel, Steel Dynamics stands out as it’s weathered a tough environment for steel and managed to stay profitable each of the past five years.
Few people know Steel Dynamics intimately, and the company’s only real claim to fame was due to Bain Capital’s (and Mitt Romneys) involvment as early investors. But besides the Presidential acclaim, there are three big reasons to like Steel Dynamics:
1. The company offers a vastly higher dividend yield than any of its much larger competitors.
2. The company has multiple revenue streams through recycling and ferrous operations that can guide it through a relatively weak short-term outlook for steel.
3. Despite paying a very high dividend, Steel Dynamics has actually doubled its cash position since 2010 and recently agreed to purchase back a large amount of debt.
Steel Dynamics could be stuck in neutral for a while, due to negative short-term factors for steel. But when steel does ramp up again, you’ll be looking at a firm that’s selling at less than half of what it did pre-recession. The company pays a dividend over 3% and its earnings are set to double by 2014 (and triple by 2015)–I like it here at a cyclical low.
Cyclical lows are buy signals
In 2007 metals and mining lead the market to all-time highs. Fast forward six years and the stock market has recovered, but these stocks haven’t.
The reason is actually pretty straightforward–the economy (and construction) was much more bullish in 2007. People were in stocks out of optimism, whereas today they’re in them because bonds and CD’s return nothing. But sooner or later, if this recovery is to continue, the prices and output from these companies must improve.
Everything is cyclical. Prices stabilize, inventories are replenished, and stocks rise. If we’re truly getting in on a cyclical low in inventories and metal prices (from 2007’s levels) these stocks could all double or even triple from here.
The article Double (or Triple) Your Money With These 4 Cyclical Stocks originally appeared on Fool.com and is written by Adem Tahiri.
