Steel companies not as strong as their product

A majority of Wall Street is betting against steel companies. Of course there are winners and losers in the steel sector, but we're going to be focusing on one company that we believe to be a loser. As the United States gets closer to the brink of a recession, financial movers believe there could be more gains from shorting than from buying.

Impact on steel from a recession

If the economy is truly entering a recession, then steel stocks are one of the first things investors dump. If consumers aren't buying, then producers aren't making. In a recession there'll be less infrastructure (unless the government contracts it), automobiles, and buildings.

As worldwide oil prices fall, the energy sector in the U.S. is getting smashed. There's a lot of steel that is used in oil production, so that's another frontier that steel has to reckon with.

Steel Dynamics (STLD)

Steel Dynamics table (revenue & NI in millions)

Steel Dynamics has been facing financial problems since 2018. From 2018 to 2019 the company saw a drop in net income by 46% and a drop in revenue by $1.4 billion.

The company is going to report their quarterly after the bell today, which reports revenues through the fiscal quarter ending in March. EPS is expected to be down this quarter compared to last year and the company has only beat one out of its four past quarters.

Investor sentiment is low for those holding onto Steel Dynamics stock. Share prices were plummeting before the coronavirus pandemic. In May 2018 shares were trading at $51.38. By December 2019, shares had dropped (-31.7%) to $35.07.

Technical charts show a long-term downtrend. Currently, shares of the company are trading at $22.90. If the U.S. enters a recession, that will probably drive share prices down even further.

After the bell

Steel dynamics is reporting their quarterly after the closing bell today. They're one of the first steel companies (along with U.S. steel corp) to report from within the steel industry. Their report could set a precedent for many others in the industry, so it's important to see what they report and how investors react.

Financial movers may want to listen to Steel Dynamics earnings report before deciding to build their portfolio with steel.

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DISCLAIMER: This article does not contain financial advice. Any and all market analysis is solely the authors opinion. Investors should do their own research before making any investment.