The typical recession advice says not to buy steel companies in a bear market. But this group of companies has been among the strongest performers year to date! Explosive steel demand has entirely outdone global supply. Despite the U.S. recession lag, global steel demand is expected to rise 5% a year. Whether you turn to the Middle East, India or China, buildings are going up daily, everywhere you look.

The most interesting market in my view is China, where they are anticipating 2008 crude steel demand to rise 11% versus a supply increase of just 6.3% (China Daily). Fast Money analyst Guy Adami says “the steel story is real,” and I don’t blame him. Let’s take a look at four of the best steel stocks money can buy!

U.S. Steel Corp. (NYSE: X)
I recommended U.S. Steel at $96.29 a share back on January 21, 2008. Today, they are trading at $140.70. I don’t mean to brag, but that’s a 46.121% return on your investment. Just a friendly reminder to trust the Net Fool!

Business as usual down at U.S. Steel is stronger than expected, and they are at a 52-week high… but I see them going higher! Why is X so special? Most steel producers need to offset higher ore costs with higher prices, but U.S. Steel has a unique integrated business model that includes self-sourced ore operations. Less exposure to the global iron ore market means potential to outperform by taking advantage of price increases without taking a hit on input costs like most other producers.

Wait for a good buying point on X, and you might be able to work in some extra gains off the top. I recommend waiting for something around $130, but who am I to discount their higher highs? I still trust steel, and U.S. Steel is still my X-factor for 2008.

Nucor Corp. (NYSE: NUE)
The recent run up in scrap metal prices, primarily due to higher than anticipated domestic & global demand, lower supply and higher-priced alternatives, has fueled a recent buying frenzy of scrap processors for Nucor. This is not a bad thing. Most notably, Nucor acquired Metal Recycling Services Inc. and said the deal “provides additional growth in the scrap metal sector.” NUE makes steel from recycled materials.

Why am I talking about this consolidation? I think Nucor is one of the smarter companies, and they are making all the right moves to vertically integrate their business. Estimates from most major firms are on the up-and-up because a lot of these deals are adding insane value and security to Nucor’s business. JP Morgan feels that rising metal spreads “are likely to result in significant margin expansion” for NUE, and I agree. Also trading near their 52-week highs, keep Nucor on a short leash.

Steel Dynamics Inc. (NYSE: STLD)
STLD is a great steel company, but i have fears that their fundamentals may have already juiced up the stock price too much. I feel that they have taken off too fast out of the gates, and you need to wait a while before jumping back on board.

That being said, Steal Dynamics is a stellar company that has eeked out profit from every corner of the market. Scrap prices have increased gross margins, “flat rolled” product pricing has outpaced input costs and even resource operations are outpacing profit expectations as demand rises.

I don’t buy the “concerns” many analysts have about STLD. Rather, I think that Steel Dynamics is one of the best in its class… but it is just not attractive enough to push more money into. Can’t get too greedy, they have nearly doubled since mid-January. This is definitely a stock to track though, and if something were to trigger a selling frenzy, I wouldn’t second guess buying on the way down.

Reliance Steel & Aluminum Co. (NYSE: RS)
Reliance is in a pretty favorable environment for growth right now, and I think they could definitely outperform in the short and long term. Things like better carbon steel pricing environments, strength in end markets (energy, oil & gas, aerospace), strong non-residential construction numbers and minimal discretionary exposure has Reliance Steel & Aluminum jumping beyond expectations.

Historically, Reliance Steel has been able to turn out huge revenue growth from smart acquisitions, I think they continue on this path (just purchased Dynamic Metals on April 2nd). Management has a great focus on improving performance where they are market leaders. In a consolidating steel market, this is a very important strategy. Trading around $62, I expect them to reach a target over $70 in 12 months, but I wouldn’t want to own them until I can get them closer to $55. Regardless, this is another winner in my eyes.

Bottom Line: Hindsight is always 20-20, and I wouldn’t be shocked if we turn around at the end of the year and say “gosh, why didn’t I buy at the 52-week highs?” I am too scared off by this run up to buy right now, but I am asserting that this industry has catalysts and all of these stocks are on my watch lists… just waiting to get my value.

-Jimvesting

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