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Mar 23, 2024

NUE Stock: Stock Of The Day Steel Leader Builds Toward Buy Point Amid U.S. Steel Fight

Composite Rating Industry Group Ranking Emerging Pattern Cup with Handle A positive chart pattern named such because it resembles the outline of a coffee cup with a handle. The pattern can last from

Composite Rating

Industry Group Ranking

Emerging Pattern

Cup with Handle

A positive chart pattern named such because it resembles the outline of a coffee cup with a handle. The pattern can last from seven weeks to as long as a year, but most are three to six months.

Nucor (NUE) is Wednesday's IBD Stock Of The Day as the steel producer looks well-positioned to capitalize on big government spending on infrastructure, the onshoring of chip manufacturing and a green-energy buildout. NUE stock, which has outperformed the S&P 500 lately as it trades in a tight range, is close to a couple of entry points.

Yet NUE stock slipped 0.8% in Wednesday stock market action amid news that Esmark is dropping its $35-a-share offer to buy U.S. Steel (X). The private firm cited the United Steelworkers union's support of the offer made by Cleveland-Cliffs (CLF). X stock fell 2.2% to 31.32, while CLF rose 0.9%. ArcelorMittal (MT), a rumored bidder for U.S. Steel, rose 0.6%, but came off its highs as the Esmark news broke near the end of regular trading.

On Nucor's July 25 Q2 earnings call, CEO Leon Topalian cast doubt on a near-term economic slowdown, highlighting "strong demand from automotive, energy, heavy equipment, bridge construction, data centers and manufacturing."

After Nucor's big Q2 earnings beat, Q3 guidance called for stable demand but lower steel pricing, producing a sequential decline in EPS. While prices have come down amid industry capacity increases and import competition, there are enough growth drivers to provide a constructive outlook. On top of that, Nucor plans to keep gaining market share and expanding its value-added steelmaking capabilities.

Nucor's earnings presentation estimates that just under $1 trillion in new federal funding for infrastructure, clean energy and reshoring will boost annual steel demand by 5 million to 8 million tons per year.

On the July call, John Hollatz — who heads Nucor's bar, engineered bar and rebar fabrication products — told analysts that infrastructure-bill-funded projects are still in the design and budgeting phase. "We expect that would flow our way probably more at the end of this year, beginning of 2024."

Wind energy is another big opportunity, with 250 tons of steel needed for every megawatt of offshore wind capacity put in place, according to Nucor. "We are the only producer in the Western Hemisphere that can make the monopiles for offshore wind," Topalian said.

Topalian told analysts that Nucor expects to double its steel volumes provided to the auto industry within three to five years.

Nucor has spent $5 billion of its $10 billion plan to grow core steelmaking operations, which include a $3.1 billion sheet mill in West Virginia that will take two years to build.

"In our view, Nucor remains well positioned to benefit from longer-term demand drivers (onshoring, infrastructure spending, etc.) while it also continues to execute on multi-year organic growth plans," BMO Research analyst Katja Jancic wrote in a July 26 note. But Jancic kept a market perform rating, saying NUE stock's price already reflected those positives.

Nucor is ranked No. 2 in the Steel-Producers industry group based on fundamental and stock performance factors, according to IBD Stock Checkup. Only Tenaris (TS), which specializes in steel pipe for the oil and gas industry, is ranked higher.

James Bouchard, whose privately held Esmark was among the bidders for U.S. Steel, told the Wall Street Journal last week that Nucor and Steel Dynamics, which both produce steel by melting scrap in electric arc furnaces, "have kicked everybody's (behinds)."

NUE stock and the entire group initially surged on Aug. 14 as investors reacted to news that Cleveland-Cliffs had offered more than $7 billion to buy U.S. Steel. The gains rested on hope that industry consolidation would be a positive for steel prices, but it may be too soon to conclude that.

CLF is arguing that its acquisition of U.S. Steel would de-risk the latter's big capital spending plans, rather than lower steel supply.

NUE stock gave up that M&A-related gain in subsequent sessions. In fact, NUE stock has etched out a three-weeks-tight pattern, which means shares have moved less than 1.5% in each of the past couple of weeks. Nucor stock closed down 1.4 points to 167.01 on Wednesday.

A move past 174.73, the high point of the three-weeks-tight pattern, would provide an entry opportunity. The three-weeks-tight formation also can be seen as a handle, offering the same 174.73 cup-with-handle buy point.

A move past the Aug. 14 high of 174.50, which would break the handle's downtrend, could provide an entry just a touch lower.

Nucor could also find a lower entry point if it revisits its 50-day line, now at 164.66, and makes a convincing bounce higher.

TS stock is trading near a buy point. Specialty metals plays Howmet Aerospace (HWM) and Commercial Metals (CMC) also are near entries.

Be sure to read IBD's The Big Picture every day to stay in sync with the market direction and what it means for your trading decisions.

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