The Dow Jones and S&P 500 are near their all time highs. The market has been on quite a bullish run and there are not a lot of screaming buy opportunities out there. Technology and retail seem a bit long in the tooth to me. There are however some sectors that still have values and I have started taking long term positions in them. Energy, financials, metals, and basic materials are largely undervalued.
I have found some intriguing names in these sectors and will be revealing more of them over the next few weeks. On Friday, I picked up shares of the largest steelmaker in the world, ArcelorMittal Steel (MT, Financial). AcelorMittal Steel was a screaming buy to me when it hit $12.67 per share. The stock was trading at its 52 week low and much of the downside appears to be already baked into the stock price. I am not saying that this is the absolute bottom for the stock but I am comfortable owning shares at this level as the stock seems to be in the range of bottoming.
Steel Stocks To Buy
ArcelorMittal (MT, Financial) is the largest steel company and fifth largest iron ore producer in the world. ArcelorMittal generates 40% of its revenue from Europe, 40% from North America, and 20% from the rest of the world. The company currently generated nearly half of all income from iron ore mining. It also has incredible diversification, as it is ltied to a wide variety of industries, including construction, automotive, energy, and transportation.
Keep in mind that ArcelorMittal carries major risk with it. The company is undergoing a significant deleveraging process. ArcelorMittal has been unloading operations recently selling off its Galldin Steel Facility. Management has been doing a good job of reducing the massive debt burden, which has hindered the company seeking to lower its level to $15 billion of indebtedness. The deleveraging process will take years to play out. Iron ore prices have been declining as demand has been slow. Earnings should rebound in future years as interest expense repayments continue to decline. The company pays a modest dividend of 17 cents (1.3%). I would prefer to see the company eliminate the dividend and use the cash savings to further reduce its debt load.
The stock price will be largely linked to the pricing and demand for steel and iron ore. I am comfortable taking an entry level position in the $12 range. ArcelorMittal trades at 0.4 times book value, 0.3 times sales, 6.8 times cash flow. Operating margins are slim at 2.4% but still positive. ArcelorMittal reported its first quarterly profit in two years and has seen EBITDA rise 3.7%. Earnings are projected for $7 billion dollars this year. The company has cut $5 billion in costs the past five years and is on target to cut an additional $3 billion dollars in cost by the end of 2015 shunning CAPEX spending and dividend raises. After 2015, the company will seek to detach larger amounts of future revenues from iron ore and coal mining operating realizing that iron ore prices restricted the recovery seen in steel prices. Any recovery in demand or price of iron ore and steel would be a big boost for ArcelorMittal Steel.
