1. Nucor Corporation (NYSE: NUE)
Number of Hedge Fund Holders: 25
Percentage Gain in Last Month: 37.48%
Nucor Corporation (NYSE: NUE) is a North Carolina based steel manufacturer. It is placed first on our list of 15 best momentum stocks to invest in. On July 22, the firm reported earnings for the second quarter, reporting earnings per share of $5.04 beating market estimates by $0.32. The revenue over the period was $8.7 billion, up more than 103% compared to the revenue over the same period last year and beating estimates by $550 million. The stock stands to benefit from the recent passing of an infrastructure bill in the US Senate.
On July 1, investment advisory Deutsche Bank reiterated a Hold Nucor Corporation (NYSE: NUE) stock but raised the price target to $100 from $75, noting that a correction was likely in hot rolled coil price forecasts owing to an increase in supply.
At the end of the first quarter of 2021, 25 hedge funds in the database of Insider Monkey held stakes worth $191 million in Nucor Corporation (NYSE: NUE), down from 29 in the preceding quarter worth $138 million.
In its Q1 2021 investor letter, Madison Funds, an asset management firm, highlighted a few stocks and Nucor Corporation (NYSE: NUE) was one of them. Here is what the fund said:
“This quarter we are highlighting Nucor (NUE) as a relative yield example within the Materials sector. NUE is a leading manufacturer of steel and steel products. It is the largest steelmaker in the U.S. based on production volume with a vertically integrated business model. The company has a low fixed-cost position due to its use of electric arc furnaces, which are cleaner, less labor and energy-intensive than blast furnaces, and this results in low total costs per unit of steel produced. Our view is that a low cost position is an important attribute in a commodity business. NUE’s historical financial record supports this view as it has been profitable every year except for one over the past fifty years, unlike many steel producing peers. In addition, the company has a diverse product and mill portfolio that takes market share over time. We believe its scale, low fixed-cost position, consistent record of profitability and diverse mill portfolio result in a sustainable competitive advantage versus peers.
Our thesis on NUE is that it should benefit from higher steel prices as the U.S. economy recovers from the downturn caused by the Covid-19 pandemic. The company may also be a beneficiary of on-shoring, where manufacturing returns to the United States. These two dynamics should drive growth this year, and if the United States Congress passes new infrastructure legislation, that will provide another avenue for growth longer-term.
Importantly, NUE has a strong balance sheet and flexible capital spending model that can quickly adjust to changing economic
conditions. If economic growth slows, NUE can quickly reduce its cost structure, something it has done successfully in prior cyclical downturns. The company has low financial leverage as its net debt/adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was only 0.9x at the end of last year, and it consistently generates positive free cash flow. These favorable characteristics differentiate NUE from other steel producers and help the company gain market share through disciplined capital allocation.
The fund purchased NUE at $56 in January, 2021, after it reached a low valuation with an attractive dividend yield and relative dividend yield versus the S&P 500. At the time or purchase, the stock yielded 3.3% and had a relative dividend yield of more than 2x the S&P 500, which was the high end of its historical range as shown in the bottom pane in the graph. The company is also a Dividend Aristocrat that has raised its dividend annually for 48 years. We expect continued dividend increases going forward.
Risks to the thesis include a prolonged economic downturn, lower steel prices and increasing steel import volumes that could hurt NUE financial performance. We believe these risks are manageable as economic growth is expected to be well above average this year. Specifically, Goldman Sachs is forecasting U.S. gross domestic product (GDP) growth of +8% in 2021, which would be the fastest pace of growth since 1950. Strong growth is likely to result in higher manufacturing activity, which we believe would be supportive of higher steel prices and limit risks to the thesis.”
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