The Surge
The prices of commodities, materials, and their related stocks benefit greatly from the current reflationary macroeconomic environment. One more materials name hit an important milestone this week. Steel company Nucor (NUE) surged right through an all-time high last set in May, 2008. Since last year’s pandemic-drive plunge, NUE has enjoyed its most sustained uptrend since the early 2000s. This achievement is testament to the reflation effect that loose monetary and fiscal policies are having on the global economy. The current surge is a somewhat delayed reaction to a strong earnings report in late April. The chart below includes quarterly operating income to suggest a connection between surging stock prices and financial performance.
The Earnings for Nucor
Here is a sample of what Nucor has to say about its strong financial performance (from the earnings release):
“The first quarter of 2021 was the most profitable quarter in our Company’s history. We are clearly reaping the rewards from our prior investments and the more strategic approaches we are taking to our key end-use markets…It is gratifying to see such strong performance across all of Nucor.
…We expect earnings for the second quarter of 2021 to exceed our first quarter results, setting a new record for quarterly earnings. Most of the end-use markets we serve remain strong and inventories remain lean across supply chains. We believe the current favorable demand environment will continue through the rest of 2021.”
Moreover, Nucor is operating almost as fast as it possibly can. The capacity utilization suggests that the company will maintain significant pricing power as the inflationary environment in the economy continues to expand:
“Overall operating rates at the Company’s steel mills increased to 95% in the first quarter of 2021 as compared to 87% in the fourth quarter of 2020 and 89% in the first quarter of 2020.”
Needless to say, the company’s bullishness and optimism for the future look quite justified.
The Trade on Nucor
Nucor’s valuation has grown along with the stock price. According to Yahoo Finance, NUE traded a year ago at just book value and less than half sales. Today, investors value NUE at 2.4 times book and 1.3 times sales. Accordingly, NUE is no longer cheap. Yet with an 8.7 forward P/E, NUE can continue to ride a rerating to higher stock prices.
As a long-term investor in NUE, I would like to continue riding this reflation trade higher from here. However, NUE is currently going parabolic. I do not like parabolic price run-ups: I do not chase them, and if I am lucky enough to participate in one, like now, I keep a wary eye open for the exits. In NUE’s case, I want to exit on the first close below one of the two big chart candles (4.6% and 3.5% gains the last two days). Parabolic moves tend to end poorly, so I would rather be on the sidelines when the stock market transitions to digesting these big gains. I will likely return on a dip.
Be careful out there!
Full disclosure: long NUE