3 steel stocks ready to profit from new Chinese tariffs

A new business cycle is underway for the U.S. economy, and the manufacturing sector may be in play. This time, it’s not just Wall Street pushing forward the bets, but also the current administration’s attempt to offshore some jobs in global steel and aluminum production.

So far the markets have accepted this new production trend. The ISM PMI manufacturing index recorded its first expansionary month in February 2024, a sign of relief after contraction lasting more than a year. As the U.S. manufacturing sector recovers, the steel industry could come into play for many investors’ portfolios.

While investors can randomly pick any steel and aluminum stock and likely earn a positive net return, the goal is to beat the market. For reasons that will soon become clear, names like Alcoa Co. NYSE: AA, ATI Inc. NYSE:ATIand even Carpenter Technology Inc. NYSE:CRS they could be the best choices in these new industry trends today.

Wall Street gets on board

Analysts at The Goldman Sachs Group Inc. NYSE:GS have sent Main Street their views on the U.S. manufacturing sector, expecting a breakthrough in their 2024 macroeconomic outlook report.

So far they have been right, as the ISM showed a 6.4% increase in export orders. As the Federal Reserve (Fed) is looking to cut interest rates this year, according to the CME’s FedWatch tool, as early as September 2024, the prospects of a weaker dollar could make American exports more attractive to foreign nations.

This connects the dots for increased export orders and money will be earned in those industries that will begin to undertake manufacturing production to meet these new orders. This sudden turn could be one reason why industrial stocks outperformed last quarter.

During this period, the SPDR fund for selected industrial sectors NYSEARCA: XLI it outperformed the broader S&P 500 index by 4%. This price action comes as technology stocks have dominated investor sentiment for much of 2023 and early 2024.

There is evidence that these stocks are potentially in play, signaling bullish sentiment supported by fundamental sector developments.

Only the best reach the finish line

This is why these stocks might be better choices rather than any steel stocks. Starting from the most aggressive story, Alcoa Analysts believe the stock could grow its earnings per share (EPS) by up to 472% over the next 12 months, significantly above the Steel industry’s average EPS growth of 10%.

Markets agree with these projections, bold as they may seem. To gauge this sentiment, investors can use the price-to-earnings (P/E) ratio, how the market places a value today on tomorrow’s potential earnings.

Valued at 21.5x forward P/E, a 105% premium above the industry average valuation of 10.5x, Alcoa’s earnings they are justified by markets as the highest quality in the space.

EPS growth of 30% is expected this year, WE HAD has a way of getting to the list. Markets have placed an 18.3x valuation on these future earnings, or a 74% premium to the sector.

Knowing the factors favorable to the company, Deutsche Bank analysts increased their price targets on the stock to $70 per share, predicting a 37% upside from today’s prices.

Being the ones who sponsored the production analysis, those at Goldman saw fit to increase their positioning in the stock by 31.8% in the last quarter, bringing the bank’s total investment in ATI shares to $59.4 million .

Expected EPS growth of 16% for the year Carpenter technology last – but not least – place on the list. Still trying to grow above the industry and being valued at a 61% premium thanks to its forward P/E of 16.9x, this stock has merit.

Benchmark raised their price targets to $100 per share, a valuation that represents a 28.5% upside from today’s stock price. Considering this price target was set in September 2023, investors could be surprised by a new rating, which could be damaging.

However, this does not appear to be a risk for institutional investors, as they own 92% of Carpenter shares. Goldman Sachs is once again on this list, increasing its position by 82.3%, bringing total exposure to $68.8 million.

From massive growth at the highest premium to the least exciting jump in EPS, although backed by Goldman Sachs, investors have a potential portfolio to play onshoring steel and aluminum production.

Before you consider the SPDR Industrial Select Sector fund, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and the SPDR Industrial Select Sector Fund wasn’t on the list.

While the SPDR Industrial Select Sector fund currently has a “hold” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here