Metals Stocks Still at Bargain Bin Levels During Rotation From Growth to Value

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The rotation from high growth-stocks into value stocks has been a key theme of September. It also means that shares of the companies that had lagged the broader bull market were starting to shine. Companies valued at 10 times earnings, or anywhere close to that, have been prized in recent trading sessions. Investors just need to keep in mind that being a “cheap” stock or sector is almost always that way for more than just one reason.

One group hurt handily during the tariff and trade war news was the base metals. Gold had risen and risen due to lower interest rates and geopolitical uncertainties, but gold often moves higher for vastly different reasons that the economically aligned companies tied to steel, aluminum, copper and so on. The base metals have to do well in economic expansions because it takes all those metals to build houses, offices, apartments, ships, planes and so on.

24/7 Wall St. has taken a look at many of the top base metals stocks. The gains from the bottom have proven to be high, but the discounts from their 52-week lows also should stand out as massive. And this is a time when the S&P 500 has returned to within 1% of its all-time high, which was hit earlier this summer.

There were downgrades for the steel industry even this summer, and some bottom-fishing investors that used these panic-exit calls have done well in their efforts. That said, in August a report from Jefferies pointed to value and upside in the industry. On September 4, Merrill Lynch lowered its expectations for steel companies based on weaker volumes and prices in a macro-view, and the firm noted few to no catalysts ahead. Still, many investors and workers remain hopeful that a large U.S. infrastructure bill ultimately will get passed.

While the bounces and performance by and large have been rather strong in recent days, investors likely will need more conviction than bottom-fishing for the sake of the value stocks having underperformed for too long. On that front, if that recession the media keeps blaring about daily does actually come, there probably are not too many investment portfolios that are going to want to be loaded up on steel and other metals stocks that are very economically sensitive.

Here is a look at the U.S.-based base metals stocks that have most of their operations in North America and are tied to trade. The large international steel and metals giants have been left out, and many of them are not recovering at the same clip. Another issue to consider is that by the time large market rotations are covered in-depth, much of the trade or opportunity already has played out. Consensus earnings estimates and price targets are from Refinitiv.

AK Steel Holding Corp. (NYSE: AKS) recently traded down 1.1% to $2.80, in a 52-week range of $1.66 to $5.11. The consensus price target is $2.01, and the market cap is $960.5 million. Shares rallied 30% in the past week. However, the stock is down 33% in the past year.

AK Steel’s big bottom was seen back at the end of May, when the stock market was in panic mode, and it is still under the $3.00 high seen at the end of July. The company recently announced that it was closing a plant in Kentucky and laying off 260 employees at a plant that reportedly sat mostly idle for the past three years. While the stock is valued at seven times expected 2019 earnings, that is a declining earnings picture from 2018, and that decline in per-share earnings is expected to continue in 2020.

Alcoa Corp. (NYSE: AA) traded up nearly 1% at $22.37, in a 52-week range of $16.46 to $45.45. The consensus price target is $28.67, and the market cap is $4.4 billion. Alcoa has rallied 21% in the past week, but the stock is down closer to 47% over the past 52 weeks.

Alcoa recently benefited from a Credit Suisse upgrade to Outperform from Neutral, and the firm raised its target price to $27 from $26. It remains to be seen if the recent breaking out of a downward channel will remain in place, and $24 is a level that acted as broken support in May and then acted as resistance throughout July. Alcoa made $3.58 in earnings per share in 2018, but that is expected to be a slight loss in 2019 and to recover to only $1.40 per share in 2020.