Stock investors had an amazing run in 2023. Despite a rocky start -- the S&P 500 in early March was actually down from the start of the year -- by the time things wrapped up for 2023, the index had about a 25% gain. So, hurray?
Maybe the proper reaction is "hurray, with caveats." On the one hand, it's great that the stock market averages went up in 2023. On the other hand, it's going to make it a bit harder to find winners in 2024.
And yet, harder isn't the same as impossible. Let's dig in and look at some promising stocks in the steel sector.
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Steel stocks look cheap
Every December, I like to dig out an old value stock screener that I first built back in 2009. I (modestly) call it my make me rich screener, and basically, what it does is search for stocks that:
- Generate significant free cash flow.
- Are expected to grow cash flow quickly.
- Carry low to no debt.
- Are bargain priced.
Running this screener over the weekend, I found three great stocks that appear to fit the bill. Curiously, all three hail from one industry: steel.
This seems especially notable in light of the fact that just last month, Nippon Steel's bid to buy U.S. Steel(NYSE: X) instantly became one of the biggest business stories of 2023. And it got me thinking: If Japan found one American steel company cheap enough to buy, might other steel stocks also be cheap in 2024?
Steel Dynamics
We begin our dive into the steel sector with Steel Dynamics(NASDAQ: STLD). It may be less well-known than U.S. Steel, but with a $19.6 billion market capitalization, the steel mini-mill operator is actually almost twice as big. And trading at a price-to-earnings (P/E) ratio of only 7.7, Steel Dynamics is also cheaper than its more famous competitor, which is valued today at 10.5 times earnings.
Steel Dynamics' attractive features don't end there. Like U.S. Steel, it carries a modest debt load, with only about $743 million more long-term debt than cash on its balance sheet. But unlike U.S. Steel, Steel Dynamics is generating free cash. Over the past 12 months, the company has generated $2.3 billion in positive free cash flow. U.S. Steel posted $104 million in negative free cash flow.
Best of all, according to data from finviz.com at least, Steel Dynamics is likely to keep growing its profits, with a five-year forward annual earnings growth rate estimated at 28%. That fact, combined with its cheap price-to-free-cash-flow ratio of just 8.4, puts Steel Dynamics at the top of my list of cheap steel stocks to watch in 2024.
Olympic Steel
One step down the supply chain from Steel Dynamics, tiny Olympic Steel(NASDAQ: ZEUS) was the second steel stock to appear on my value screener. Technically a "metals service center," Olympic processes and distributes steel that other companies manufacture.
Don't be put off by the company's small size or downstream position. This seems like a highly profitable niche. Over the past 12 months, Olympic Steel reported only $41 million in net profit (giving it a P/E ratio of 19.2). But the company churned out $183 million in real free cash flow (FCF) -- more than four times its reported profits.
This gives Olympic a P/FCF ratio of only 4.2, which seems very cheap, particularly if it comes anywhere near hitting the 38% five-year earnings growth rate it's projected to achieve.
One fact does give me pause, however. According to data from S&P Global Market Intelligence, Olympic has no official coverage among Wall Street analysts. So the soundness of "38% growth" projection isn't 100% clear. For that reason, I'd take this forecast with a few grains of salt.
Ferroglobe
Last but not least, we cross the pond to check out London-based Ferroglobe(NASDAQ: GSM), a specialty metals company producing silicon-based chemicals used to make (among other things) stainless steel, carbon steel, and various other steel alloys.
Valued at $1.3 billion, Ferroglobe stock is roughly twice the size of Olympic -- but just a fraction of the size of Steel Dynamics -- and its valuation likewise lies somewhere between them.
Over the last 12 months, Ferroglobe reported $100 million in net profit, but its free cash flow was much better -- $196 million. The company sports a 10.7 P/E ratio and a P/FCF ratio of 8 -- with a 20% projected growth rate. On the downside, unlike Steel Dynamics and Olympic Steel, Ferroglobe does not pay a dividend.
Ferroglobe's more modest growth projections, paired with its still-modest P/E and P/FCF ratios, make it arguably the most conservative pick of these three. That said, Steel Dynamics' and Olympic Steel's cheap valuations and superb projected growth rates also look attractive. Ultimately, all three of these steel stocks have numbers good enough -- on the surface at least -- to earn them a place on a value investor's watch list as the calendar flips from 2023 to 2024.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
