by Marc Lichtenfeld, Senior Analyst, Investment U
While most investors are focused on precious metals, I prefer to look for investment opportunities in markets less traveled.
Sure, precious metals are still wildly popular – or not popular enough – depending on who you ask. And they're always in the mainstream consciousness. Either the dollar is going to be worthless and gold and silver will be the only true stores of value, or precious metals are in a bubble and will correct to more reasonable levels. Again, it depends who you ask.
But there's another type of metal that I have my eye on. It's one that hasn't enjoyed the kind of run-up that gold and silver had recently.
Steel, and the companies that make the industrial metal, have been sinking like a piece of iron in a swimming pool. And this decline is likely to continue, here's why…
Steel Industry Faces Weakening Demand and Price Erosion
Last week, Steel Dynamics (Nasdaq: STLD) tanked after issuing an earnings warning. The company said second-quarter earnings per share would be $0.35 to $0.40 rather than the $0.57 Wall Street was expecting. The lower-than-expected guidance was due to a slump in orders in April and increasing costs.
Other companies within the steel industry, including Arcelor Mittal (NYSE: MT) and Nucor (NYSE: NUE), have also been weak as more investors question the economic recovery.
- The International Monetary Fund recently cut its U.S. 2011 GDP estimate to 2.5 percent from 2.8 percent as more evidence of a slowdown emerges.
- Last month, 28 states lost construction jobs versus the 22 that added them.
Should the recovery falter, it'll be particularly painful for steel companies, as construction is a bellwether of economic activity, particularly new homes.
And the folks who are buying steel are losing their optimism. The Steel Market Update's Steel Buyer's Sentiment Index, while still positive, is at its lowest level of the year due to concerns about price erosion and weakening demand.
"Even those involved in segments of the steel industry which have been doing relatively well since the beginning of the year – such as automotive – were displaying signs of concern about lack of strength in the overall U.S.