Tuesday, December 06, 2005

Do you really want to own a Steel Stock?

If the basis of owning a steel stock is global demand emanating from China, this article should cause you some concern.

Cyclicality can be exaggerated or mitigated by economic cycles. However, industry behavior is quite telling.

The recent interest in steel has been predicated by the ongoing battle for the Canadian steel producer Dofasco. This company has been a remarkably consistent performer in the North American marketplace. Since 2000, the company has had CFFO of Cdn$1.9 billion and capex of only Cdn $1.04 billion for FCF of Cdn $860 million.

However, year to date, the company has generated negative cash flow of Cdn $218.5 million. Return on invested capital has dropped from 10% plus levels to less than 1% in the most recent quarter.

The understanding of competitive advantage period, that limited period of time during which a company can earn excess returns is very important to investment.

Insiders have also demonstrated some interesting behavior in these stocks:

Company Insider Sales last 6 months
NSS Group $6.263 million
US Steel $7.145 million
Nucor $6.090 million
Carpenter Tech $11.518 million

If you believe that the picture for steel is different in India, read on.


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