Steel Companies Among 2016’s Biggest Winners
Posted: December 20, 2016
Top performers in the U.S. stock market this year are Cliffs Natural Resources Inc., up 482 percent; AK Steel Holding Corp., up 363 percent; Chemours Co., up 350 percent; United States Steel Corp., up 335 percent; and Fairmount Santrol Holdings Inc., up 314 percent.
Those were the best through Dec. 16 among some 1,500 U.S.-based stocks with a market value of $2 billion or more.
The five worst were Juno Therapeutics Inc., down 60 percent; Tableau Software Inc., down 53 percent; Alnylam Pharmaceuticals Inc., down 53 percent; LendingClub Corp., down 52 percent; and First Solar Inc., down 47 percent.
Among these 10 stocks, I see one that I think is a good buy now, First Solar, and one that I think is an interesting speculation, Alnylam Pharmaceuticals.
The Winners
Cliffs Natural Resources (CLF) mines iron ore. In 2008, when natural-resource stocks were all the vogue, Cliffs stock surpassed $100 a share. Now it’s just above $9, which I would consider a decent buy except that the company’s $2.2 billion in debt still looks like a sword of Damocles.
AK Steel (AKS) also has negative net worth. The company is coming off seven years of losses and should show a small profit this year. In my judgment, the stock is not cheap enough to compensate for the risks.
A 2015 spinoff from DuPont, Chemours (CC) produces titanium dioxide, Freon, Teflon and several other chemicals. As often happens in spinoffs, Chemours got saddled with a lot of debt. The stock sells for 29 times recent earnings and 13 times estimated 2017 earnings. I’d say it’s fairly valued.
ONCE BIGGEST
U.S. Steel, once the nation’s largest corporation and now classified as mid-sized, has a better balance sheet than AK Steel does. But its revenue continues to shrink. I would wait for more economic strength in China (a major steel consumer and, hence, a big influence on world steel prices) before buying here.
Fairmont Santrol (FMSA) provides sand to energy companies that use it for fracking (hydraulic fracturing of rock formations to loosen up oil or gas deposits). It also provides sand to glass producers, landscapers, the filtration industry and others. Unfortunately, it went public around the time of the energy bust. It has been struggling and posting losses.
The Sinners
Juno Therapeutics (JUNO) is a biotech company working on cancer therapies. Trying to pick winners among early-stage biotechs is like betting on a horse race among yearlings. There’s a potentially big payoff but lots of hope and supposition involved. One promising Juno drug fizzled last year.
Tableau Software (DATA) has been posting losses and experiencing rapid declines in revenue. Demand for its business analytics software isn’t keen. Analysts expect the company to come back in 2017 and post a small profit, but the stock sells for about 200 times the estimated 2017 earnings.
Alnylam (ALNY), another biotech outfit, focuses on diseases that are relatively rare — amyloidosis and hemophilia, for example. It has a long and prestigious list of research partners, including (among others) F. Hoffmann-LaRoche, Monsanto and University of British Columbia. Don’t look for profits here soon, but at least one drug is in Phase III trials.
Straight Downhill
Lending Club (LC) provides an online marketplace that connects lenders and borrowers, often at interest rates that fictional mobster Tony Soprano might like. (The average five-year loan rate was recently above 17 percent.) Lending Club itself does plenty of borrowing; its debt is more than four times equity. And revenue fell 21 percent in the past 12 months.
Who was the idiot who recommended First Solar (FSLR) in 2013 and again in August of this year? Oh yes, that was me. The maker of solar installations has suffered a big decline in earnings over the past year. Moreover, the Trump administration is expected to be less solar-friendly than the Obama administration was.
Nonetheless, First Solar stock is so cheap that I recommend it at current levels. At $35, it trades for 1.1 times revenue and 0.6 times book value.
Track Record
This is the fifth column I’ve written on the year’s big winners and losers. On average, the stocks I recommended have risen 36.4 percent. A strategy of buying the previous year’s winners would have produced a 24.9 percent return, while buying the previous year’s losers would have returned 28.6 percent.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: One of my clients owns a Cliffs Natural Resources bond. I have no positions personally or for clients in the other stocks discussed here.