Steel Dynamics, Inc. (STLD) Joins in Sector-Wide Swoon

Steel Dynamics, Inc. (STLD) is sliding on a bearish analyst note

Jan 12, 2017 at 10:46 AM
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Steel stocks are getting walloped today, after Credit Suisse downgraded the sector to "market weight" from "overweight," citing weak demand trends and heightened supply-side concerns in the U.S. Among the casualties is Steel Dynamics, Inc. (NASDAQ:STLD), which Credit Suisse specifically targeted -- dropping the stock's rating to "neutral." At last check, STLD was 3.4% lower at $35.80.

Taking a quick step back, it isn't uncommon for brokerage firms to have their doubts about the steel industry. According to our internal Sector Scorecard, less than half of the analysts with coverage on stocks falling under the the "steel iron" umbrella have handed out "buy" ratings. This skepticism comes despite an average year-over-year return of 261.5% for the nine stocks we track within the sector -- all but one of which are above their 80-day moving averages.

The technical story is similar on STLD. Today's drop is pretty modest, relative to the stock's long-term gains. Specifically, since this time last year, the shares have advanced more than 118%. Plus, Steel Dynamics could be getting ready to bounce, having just touched its 40-day moving average. Historically, the stock has hit this trendline six times in the past three years, and has posted positive returns on two-thirds of those occasions in the ensuing five sessions. In fact, going out further to 21 trading days, STLD's average post-signal return is 2.7% -- though it's been positive less than half the time.

However, unlike the broader steel sector, STLD hasn't been spurned on Wall Street -- today's note aside. In fact, 75% of analysts rate the shares a "buy" or better, without a single "sell" opinion to be found. Plus, the average 12-month price target of $39 stands at a healthy 8.9% premium to current levels. In other words, there's limited potential for the stock to benefit from upgrades and price-target hikes.

Options traders have fairly high hopes, too. STLD boasts a top-heavy 10-day call/put volume ratio of 3.32 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In other words, long calls more than triple puts.

Lastly, short sellers have been exiting en masse. During the past two reporting periods, these bearish bets dropped nearly 37%, and now account for less than 5% of Steel Dynamics, Inc.'s (NASDAQ:STLD) total float. Long story short, there's little potential here for a short-squeeze rally, as it would take fewer than three days for short sellers to buy back their positions, based on the stock's average trading rate.

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