Today’s article provides an overview of the cheapest steel stocks in the stock market.

Why bother with steel stocks? Normally the financial media isn’t interested because they are boring stocks that aren’t about sexy headlines. They are investments that are beholden to economic cycles.

Still, because of the Chinese trade war, steel stocks have gotten some attention. By placing tariffs on Chinese steel imports, President Trump grabbed headlines, because a tariff is effectively a tax. So China retaliated and did the same thing.

Why impose the tariffs? Trump’s theory is that a tariff makes steel imports more expensive. Thus, that creates less supply, which means US steel makers are happy because they have to fill demand, which means more production, which pushes up the prices that they get paid for that steel.

The downside is that also means higher expenses, and thus the steel manufacturers have to raise prices to the end-users.

This whole situation has created opportunity in the steel stock sector.

The Cheapest Steel Stocks For 2019

If you’re in a hurry, below are our picks for the cheapest steel stocks as of this writing.

1. Schnitzer Steel Industries: Instead of manufacturing, Schnitzer recycles.
2. Nucor Corporation: Probably the best positioned steel company.
3. U.S. Steel: The tough granddaddy of the sector.

Keep reading and you’ll find out more about the cheapest steel stocks and my thoughts on each.

What Are Steel Stocks?

There are three major ways to invest in steel stocks. You can invest in companies that process raw steel materials into products for manufacturers. You can invest in the manufacturers themselves. You can invest in companies that recycle scrap.

The most important fact about the lowest priced steel stocks that you must know is that steel is a commodity. That means its pricing is strongly linked to economic cycles and trade issues, like the ones we are having with China.

Not only are we stuck in a trade war with China, which affects our steel companies, but China’s economy may be slowing down, which affects demand. China’s manufacturing activity index slowed to 50 in October, down from 51.6 in February.

Not only that, there’s more! Besides slowing demand, we are also looking at oversupply. This goes to the age-old problem with China as a manufacturer. They can produce cheap goods, which means higher profits, which means the more production there is, the more profit.

That’s been occurring. As a result, oversupply pushes prices lower.

The only offsetting factor to this is that global steel demand is going to rise 1.4% next year, according to the World Steel Association. In addition, the WSA predicts increases in non-residential demand in Europe, and longer term demand hopes pegged to strong global economic growth.

Read more: What are the Best Steel Stocks for 2019?

How Do You Determine What Qualifies As The Best Steel Stocks?

The cheapest steel stocks have at least two of these three characteristics:

1. Strong cash flow
2. Debt service coverage
3. Diversification

Strong cash flow

If there is one lesson you should take away from anything involving commodities or cyclical stocks, it’s that cash flow matters more to these companies than any others.

That’s because eventually the economy turns down, and the companies that are the safest are the ones with the strongest cash flows. The other key element, though, is that when the market gets upset (as it is now), steel companies with that cash flow may also become the safest and least expensive steel stocks.

Debt service coverage

Debt is a blessing and a curse. If a stock can get reasonably inexpensive debt, use that debt properly, and generate cash flow to pay interest (debt service), then it has good prospects.

However, debt can destroy a company. If they carry expensive debt, then they may not be able to service it, which is why cash flow is so important.

If interest payments can’t be made, the company risks default and those cheapest steel stocks become so cheap that they go to zero.

Diversification

I mentioned that there are three ways to invest in steel stocks. The best companies are diversified and handle more than one of those ways that steel companies operate. Alternatively, if a company is involved in a service that isn’t entirely devoted to steel, then they are partially protected from any downside or upheaval in the steel markets.

Here’s a video that provides very basic information on investing in steel stocks.

Schnitzer Steel Industries

What is it?

Schnitzer was founded in 1906 and both recycles metals and manufactures finished steel products. The recycling is done through its Auto and Metals Recycling division. The products are then sold or used in finished steel products.

But Schnitzer is diversified, and also recycles aluminum, copper, stainless steel, nickel, brass, titanium, and lead.

Its Cascade Steel and Scrap division produces finished steel products using recycled scrap metal.

What makes it a cheap stock?

Schnitzer has diversification, and that’s foremost in this industry, as I mentioned. More importantly, it has really turned around from a $200 million money-losing year in 2014 to a $156 million profit this past year. It is forecasted for 10% annualized earnings growth.

Free cash flow has been erratic, but positive during this entire period, ranging from $55 million in 2017 to $82 million this past year. Debt service is negligible.

What I particularly like is the recycling business. While everyone else is making stuff, Schnitzer has a business that destroys stuff and repurposes it.

Nucor Corporation

What is it?

Nucor was founded in 1940, and today operates in three divisions, also giving us that important diversification we discussed.

For starters, like Schnitzer, it has a scrap metal division that mostly handles aluminum, so it is diversified there away from steel.

It is a manufacturer through its Steel Products division, where it manufactures bulk items used in municipalities, such as bridges, utilities, hospitals and schools.

The Steel Mills division takes steel and sells it to other industry players, like the energy, automotive, heavy equipment, and transportation sectors.

What makes it a cheap stock?

Nucor is a legacy player with a rock-solid history. It is diversified.

The first thing most people notice in its balance sheet is the $3.2 billion of long term debt, a decline from over $4 billion in 2015. However, it fits the criteria of having debt service that is reasonable.

In fact, it has a negative net interest expense on its financial statements because it earns more interest on its investments and other business than it pays on its loans.

Finally, it has that robust free cash flow that it needs. Stuck with a negative $45 million of FCF in 2016, it leapt to $560 million in 2017, and $770 million in 2017.

U.S. Steel

What is it?

U.S Steel was founded in 1901, and is about as close as you can get to a pure-play steel manufacturer. It sells two forms of steel in North America and Europe: flat-rolled and tubular.

Flat-rolled products are so named because the steel is manufactured in long flat sheets between 1mm and 10mm in thickness, or plates between 10mm and 200mm thick, and then rolled up. These are used for large welded pipes, ship building, construction, and boilers.

The tubular products are designed for more specialized operations, for use in industrial applications, to transport liquids or gases, for all kinds of lifts and mills, for transportation, home appliances and aerospace

What makes it a cheap stock?

U.S. Steel is one of the cheapest steel stocks because the market is hating on steel, thanks to the steel tariff trade war.

The good news is that its debt service is not an issue, and much of the debt it holds is offst by a sizable $1.35 billion cash position. It also reduced debt from about $3 billion in 2014 and now has $2.5 billion.

While I’m not crazy about its cash flow, in that its rather erratic and has been declining, it still has that free cash flow. $425 million in free cash flow in 2016 fell to $300 million in 2017, and down to $130 million in the past twelve months.

That may be one of the reasons the market has taken US Steel stock down to the current level.