Hedge Funds Are Buying These Steel Stocks

The steel industry has seen an unprecedented rally this year with some stocks boasting gains of over 100% so far in 2016. While some of those gains can be attributed to the rally in commodities, a large part of it was a direct result of the U.S. Department of Commerce imposing a hefty duty on imports of cold-rolled steel from seven countries, on March 1. When the Department of Commerce made this move, it gave a glimmer of hope to investors that the U.S. steel industry might finally be out of the woods after seeing one of the worst downturns ever. While scanning the portfolios of over 800 hedge funds we track, we found that a number of them jumped on this opportunity and started buying steel stocks during the first quarter. However, they didn’t just buy stocks of companies based in the United States, but also of global majors with a large presence in the country. In this post, we will take a look at the top five steel stocks on which funds covered in our database collectively became bullish on heading into the second quarter.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

#5 Harsco Corporation (NYSE:HSC)

– Investors with long positions (as of March 31): 18

– Aggregate value of investors’ holdings (as of March 31): $53.21 million

Let’s begin with Harsco Corporation (NYSE:HSC), whose ownership among funds covered by us increased by three during the first quarter, but the aggregate value of their holdings in it declined by $11.4 million during the same period. Harsco Corporation (NYSE:HSC)’s stock saw a heavy decline at the end of February after the company reported weak numbers for its fiscal 2015 fourth quarter. While the stock has managed to recoup those losses in the past few months, it is still trading down by over 17% year-to-date. For its fiscal 2016 first quarter, the industrial services company reported EPS of $0.03 on revenue of $353 million, soundly beating analysts’ estimates of a loss of $0.05 per share on revenue of $347.50 million. Hedge funds that reduced their stakes in Harsco Corporation during the first quarter included billionaire Israel Englander‘s Millenium Management, which cut its holding in the company by 37% to 845,290 shares.

#4 ArcelorMittal SA (ADR) (NYSE:MT)

– Investors with long positions (as of March 31): 21

– Aggregate value of investors’ holdings (as of March 31): $235.21 million

The number of hedge funds tracked by us long ArcelorMittal SA (ADR) (NYSE:MT) increased by five and the aggregate value of their holdings in it swelled by $40.5 million during the first quarter. Billionaire Jim Simons‘ Renaissance Technologies increased its stake in the company by 89% to 5.56 million shares during that period. Though shares of the steel giant are currently trading up 12.8% year to date, they are still down 55% and 85% over the past 12 months and five years, respectively. According to analysts, after seeing such heavy declines, at these levels the stock has limited downside risks given that the company can manage to generate more than $4.5 billion in EBITDA  and continues to remain cash flow positive. To reduce the debt on its balance sheet, on May 11, ArcelorMittal SA (ADR) announced that it would be buying back $1.5 billion worth of its most expensive bonds, which sport a coupon yield of 9.85% and are due 2019.

#3 Rio Tinto plc (ADR) (NYSE:RIO)

– Investors with long positions (as of March 31): 24

– Aggregate value of investors’ holdings (as of March 31): $281 million

Mining behemoth Rio Tinto plc (ADR) (NYSE:RIO) saw a marked increase in its popularity among hedge funds during the first quarter with its ownership among funds covered by us increasing by 50% and the aggregate value of their holdings in it jumping by 200%. In anticipation of the company’s first quarter earnings, Rio Tinto plc (ADR) (NYSE:RIO)’s stock saw a major rally in April. However, it has given up all those gains in the past couple of weeks and currently trades down 5.4% year-to-date. On May 23, Axiom analyst Gordon Johnson released a note to his clients in which he asked them to stay away from mining stocks, arguing that the recent hawkish commentary  by the Fed will cause major metal, mining, and mining equipment stocks across the globe to start another down move. Mr. Johnson also stated that China devaluing Yuan even further is the biggest risk that these stocks face. Hedge funds that initiated a stake in Rio Tinto plc during the first quarter included Robert Bishop‘s Impala Asset Management, which purchased almost 3.0 million shares of the company.

#2 Nucor Corporation (NYSE:NUE)

– Investors with long positions (as of March 31): 29

– Aggregate value of investors’ holdings (as of March 31): $524.2 million

Moving on, the stock of steel products manufacturer Nucor Corporation (NYSE:NUE) has appreciated by over 25% so far this year, but is finding it extremely hard to break its stiff resistance near the $51 mark. During the first quarter, the number of hedge funds tracked by Insider Monkey long Nucor Corporation (NYSE:NUE) increased by nine and the aggregate value of their holdings in it jumped by 74%. However, legendary trader and billionaire Steve Cohen‘s Point72 Asia (Singapore) slashed its holding in the company by 35% to 650,000 shares during the same period. Nucor Corporation pays a quarterly dividend of $0.38 per share, which even after the rise in its stock still translates into an attractive annual dividend yield of over 3% currently. On May 10, analysts at Rosenblatt Securities reiterated their ‘Neutral’ rating on the stock, while boosting their price target on it to $51 from $47.

#1 Steel Dynamics, Inc. (NASDAQ:STLD)

– Investors with long positions (as of March 31): 35

– Aggregate value of investors’ holdings (as of March 31): $805.45 million

Finally, not only did Steel Dynamics, Inc. (NASDAQ:STLD) saw an increase in its popularity among funds soar during the first quarter, its stock also appreciated by over 26.76% during that period. Steel Dynamics, Inc. (NASDAQ:STLD)’s stock currently trades with year-to-date gains of 44%, which is the highest gain registered by any stock covered in this list so far in 2016. The ownership of the company among funds covered by us increased by 25% and the aggregate value of their holdings in it increased by over 50% during the first quarter. Funds that boosted their stake in Steel Dynamics during that period included Dmitry Balyasny‘s Balyasny Asset Management, which increased its holding by 91% to 5.32 million shares and became its largest shareholder at the end of March among funds covered by us. Currently, Steel Dynamics’ stock sports an average rating of ‘Overweight’ and an average price target of $26.88 from the 18 analysts on the Street who cover it.

Disclosure: None