With Biden’s $2 billion infrastructure bill now in the hands of the House of Representatives, we think this is a bill that is likely to pass in one form or another.
If this happens, the steel industry is without a doubt one sector that can heavily benefit from the American Jobs Plan.
One of the biggest steel companies in North America is Nucor (NYSE: NUE) which we think could be a potential value play if the infrastructure bill passes.
The stock did initially peak in 2008 prior to the economic crisis that followed and operating margins from sales fell from 15% to 5-10%, a range they got stuck in for many years. However, the company did use the time wisely and invested heavily in upgrading the business.
In confluence with soaring steel prices that were up +49%/ton in Q1 2020 compared to the year prior, ultimately the Nucor’s investment paid off big time. In Q1, the company reported quarterly earnings of $937 million which was greater than all earnings reported in 2020 and Q2 came in even stronger at $1.5 billion, bumping its net income for the first half of the year to $2.4 billion (Source: Nucor).
Based on all this, it’s not hard to see why the company’s stock has sky-rocketed this year by over 130% YTD.
Also, from a long-term investing perspective, besides the strong financials and the potential of Biden’s investment bill passing, it’s also worth noting that Nucor does pay a 1.35% dividend.
Now, in terms of potential risks, something to keep in mind if you’re thinking about investing in this sector is that the steel industry is a highly cyclical industry which is doing well in economic growth times and poorly when the economy is tanking.
In conclusion, even though there is a lot to like about Nucor, we do think the stock is too expensive at current price levels. However, we do think Nucor could offer a solid value play on deeper pullbacks.
Technical Analysis
After peaking in 2008, the stock traded sideways in a large +$50-range for almost 13 years (!) before finally breaking out to new all-time highs in May this year.
Looking at the monthly chart above, the stock currently looks very extended and strong extensions like this are often followed by an exhaustion pullback.
If this manifests, we think that the first deep support zone comes in at around $75-$83.50 (all-time-high from 2008) followed by $67-$70.
Option Positioning
Currently there are about 100K calls and 62K puts with about 15% of the options rolling off this Sep op-ex. Options positioning suggest the first support zone is coming in around $110.
FULL DISCLOSURE: Chris Capre currently has no stock or option position in NUE. If you’d like to learn more about Chris’s trades and positions, you can get access via the Trading Masterclass where he shares his live trades, further investment ideas and daily market analysis.
