Update Gerdau (GGB)

On March 3 Gerdau (GGB) joined the club. (No, not Jubak’s Picks. Gerdau has been a member of that club since September 2010 http://jubakpicks.com/the-jubak-picks/ )

When the company reported earnings on March 3, the Brazilian steelmaker announced that it would reduce discounts on some products now that a steel industry recovery is underway. That puts Gerdau right in the middle of a wave of price increases (removing a discount is a price increase, right?) that built up significant momentum in February and that looks likely to continue through the second quarter of 2011. Some industry analysts are looking for a 60% increase before the cycle is done.

Gerdau is simply looking to reverse discounts that resulted in an 8 percentage point decrease in operating margins in the fourth quarter of 2010 from the prior quarter. That drop in margin was a big contributor to the 35% plunge in net income from the fourth quarter of 2009. Even so the company’s net income of 2.5 billion reais came in ahead of analysts estimates of 2.2 billion reais. Revenue matched estimates at 31.4 billion reais.

Companies that make steel for the auto industry are likely to remain challenged in the first half of 2011 by the strong Brazilian real, competition from Chinese imports, and rising costs of raw materials.

The picture is different for Gerdau, Brazil’s largest producer of long steel for the construction industry. (If you combine Gerdau’s Brazilian and U.S. operations, the company is the largest producer of long steel in the Americas.) Read more

Buy Gerdau (GGB)

Brazilian steel maker Gerdau (ADR: GGB) is on the march in the U.S. steel market and back home in Brazil.

In the United States:  in August, the company acquired the remainder of the shares of its 66% owned U.S. subsidiary Gerdau Ameristeel. That gives Gerdau a wholly owned platform for expanding in the U.S. market. (The acquisition of the remainder of Gerdau Ameristeel will also reduce that company’ cost of capital since parent Gerdau pays only half as much as the subsidiary in the capital markets.) The company didn’t let much moss grow on that deal. On September 15 Gerdau announced that it would acquire TAMCO, a California mini-mill that is a producer of long-steel products, such as rebar, used in construction.

In Brazil: the company is pursuing an expansion of capacity that will add a new mill producing flat rolled steel, beginning production in 2012, and diversifying the company away from long steel products. In the long steel market Gerdau is the second largest producer in the world.

Long steel has been a depressed market because of the slowdown in construction in the United States and in other economies.

I actually like that. Read more

Are you in the right sectors of the stock market for this point in the economic recovery? (Yes, despite the stock market correction, we are still in an economic recovery.)

Solid data stretching back to 1945 argues that certain industries and sectors outperform during specific stages of any economic recovery. (The best work on this subject comes from Sam Stovall, the chief investment strategist for Standard & Poor’s Equity Research Services. His 1996 book Sector Investing is still the best resource on the subject to my mind.)

My first rule of investing is “Put every trend you can on your side.” Neglecting what we know about what sectors thrive when is in my opinion wasting an asset that could help you make bigger profits.

Stovall divides the economic cycle into four stages. Read more

After this rally I’m still waiting for signs that the economy is in a sustained recovery

Cash flows and cheap money are enough to keep the current rally going into 2010, I believe.

Comparisons with really, really weak quarters in the first half of 2009 for global economies in general and for company earning in particular favor a continuation of the upward trend in stock prices in the quarters that end in March and June 2010, I believe.

After that, though, things begin to look decidedly dicey—unless investors can see clear signs that the growth we’ve seen in the last half of 2009 is sustainable and is building momentum.

On that, unfortunately, the jury is still out.

Take recent numbers from the North American steel industry, for example. Read more

Steel, a leading indicator on the economy, could be turning negative

Steel goes into buildings, appliances, and cars. That makes demand for steel a leading indicator for the economy since companies order steel in antipication of rising sales of their own products.

This summer global demand moved up and so did prices. In  August a metric ton of hot-rolled  steel went for $600 to $620 a ton. Rising steel prices on rising demand provided a sign that the global economy was headed for recovery.

Now prices have dropped back to $570 a ton, according to World Steel Dynamics.

Does that mean that we’re headed back towards recession again? Read more