The pandemic has disrupted and scrambled so many parts of the economy and markets. This includes the assumptions we make about certain types of stocks and the categories that we classify them in.
For instance, when investors discuss growth industries, steel stocks are not the first thing that comes to mind. Typically, they are better classified as value or cyclical stocks.
However, ArcelorMittal (MT), one of the world’s largest steel companies, is not just an attractive value investment. I believe that growth investors should also take a look at this stock, based on its recent earnings reports and the post-pandemic changes in the economy.
Read on to find out why ArcelorMittal (MT) is my growth stock of the week.
MT is a multinational steel company, headquartered in Luxembourg. It is the second-largest steel producer in the world and produced 89.8 metric tons of steel in 2019 which equates to about 10% of global steel.
The company was formed by a merger between Indian-owned Mittal and French-owned Arcelor in 2006 in a $33 billion hostile takeover. Making acquisitions is in the company’s DNA, and it’s acquired other steelmakers and also companies that are lower on the supply chain to ensure commodity supply.
Sector Fundamentals Improving
Steel stocks struggled over the past decade as the previous bull market led to overinvestment in new production. Prices sagged as global growth trended below 2% for most of the decade, leading to weak demand.
On the supply side, we didn’t have the typical contraction in supply that happens during bull markets due to high levels of Chinese supply which were price-insensitive due to the government’s focus on employment.
Today, the supply and demand picture is in much better shape. Supply finally contracted as prices remained low, and the Chinese government is now focusing on reducing emissions which is impacting steel production. Demand should also be strong over the next decade with governments spending aggressively on infrastructure, a housing inventory shortage in the US, and expectations of a CAPEX boom.
Any skepticism about MT’s growth story should diminish by looking at its recent earnings report. The company reported a 52% increase in revenue due to higher steel prices and iron ore prices. These prices have soared due to demand returning to pre-pandemic levels, while inventories remain tight. Net income was 572% higher at $4.6 billion, certainly an impressive quarterly figure given its market cap of $32 billion.
MT is currently valued as if its earnings gains are transitory. However, this may not be the case due to increasing infrastructure spending, low levels of housing inventory, and expectations of strong CAPEX spending over the next decade.
Usually, the market offers a tradeoff between growth and value. So, it’s notable that MT is an exception.
It currently has a forward P/E of 3.8 which is substantially cheaper than the S&P 500’s forward P/E of 21. The company is also expected to earn about $4 per share in free cash flow over the next 12 months which equates to about 13% of the market cap and indicates some increase in dividends or buybacks is likely.
MT also stands out in terms of constantly improving its margins. Currently, operating margins are at 21%, a new high over the last decade due to improved sourcing and more efficient operations.
MT has an overall grade of A in our POWR Ratings system which equates to a Strong Buy. A-rated stocks have posted an average annual performance of 30.7% which compares favorably to the S&P 500’s annual 7.1% gain.
The POWR Ratings also assesses stocks by various categories including Growth, Value, Stability, Sentiment, Momentum, Industry, and Quality to give more insight to investors. In terms of component scores, MT has 3 As, 3 Bs, and 2 Cs. Click here to find out EXACTLY how MT stacks up in terms of the POWR Ratings and against its peers.
MT is just one of 15 selections in my POWR Growth portfolio. That’s where I combine my many years of investing experience with the Top 10 Growth Stocks strategy, which has +46.42% annual returns, to bring investors the best growth stocks for today’s market.
If you would like to see the current portfolio of 15 stocks and be alerted to our next timely trades, then consider starting a 30-day trial by clicking the link below.
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MT shares closed at $32.03 on Friday, down $-0.17 (-0.53%). Year-to-date, MT has gained 40.98%, versus a 24.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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