Update Steel Stocks Part 1: STLD CALLS

On July 29, I started coverage on buying the options of U.S. steelmakers and I started that piece with coverage on trading options of Steel Dynamics, Inc. (NASDAQ:STLD). Steel Dynamics with its market capitalization of $4.82B is a steel producer and metals recycler in the United States. The Company operates in three segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations.

When I wrote that piece, shares of Steel Dynamics were trading at $21.80. Nonetheless, I went long STLD with a $25 price target and I recommended the STLD Jan 2015 23.000 call (STLD150117C00023000at the asking price of $0.75.

Performance in Less than 2 Months

As at market open today, shares of Steel Dynamics made a new 52-week high of $25.51 to mark a 17.01% gain since July 29 when I started coverage on the stock. The Jan 2015 23.000 call that I recommended at an asking price of $0.75 was already up 60% this morning $2.80. More interesting is the fact that the option is up 273.33% since I initiated coverage on July 29.

More Upside Potential Ahead

STLD Stockchart

The chart above shows how shares of Steel Dynamics have traded since the markets opened this year. The stock is already up 33.21% as it trades at a 15.58% premium to its 50-day moving average and at a 35.54% premium to its 200-day moving average. More interesting is the stock’s RSI Index of 73.26, which shows that the stock is just foraying into overbought territory. However, the fundamental reasons that I will advance in the following paragraphs suggests that we can expect the bullish momentum to continue.

Optimistic Q3 Expectations

Steel Dynamics yesterday gave its third quarter (Q3 2014) forecast of what we can expect when it releases results next month. The company forecasts third quarter adjusted earnings to be between $0.42 and $0.46 per share to beat the consensus analyst estimate of $0.37 per share.

The takeaway from the forecast is that “continued increased demand for the company’s structural steel and fabricated steel joist and decking products indicates the nonresidential construction market is continuing a positive trend.  Third quarter 2014 profitability from the company’s fabrication operations is expected to continue to increase based on both improved volume and margin.”

Rewarding Shareholders with Dividends

It is also worthy of note that Steel Dynamics declared a quarterly cash dividend of $0.1150 per common share, payable to shareholders on record by September 30. I strongly believe that the fact that Steel Dynamics is set to go ex-dividend by the end of this month will sustain the bullish momentum as income hunters keep the buying action alive.

Strategic Acquisitions

A day before yesterday’s optimistic third quarter forecast, Steel Dynamics announced the completion of the acquisition of Severstal Columbus, LLC (“Columbus”), one of the newest and most technologically advanced mini-mills in North America. The takeaway from the acquisition is that “the acquisition of Columbus significantly expands and diversifies the company’s steel operating base, increasing Steel Dynamics’ annual steel shipping capacity to 11.0 million tons, a 40 percent increase.”

How to Trade STLD Options

There is still profit to be made on the STLD Jan 2015 23.000 call (STLD150117C00023000contract that I recommend in July. If you are new to the steel party, I will encourage you to dive in ASAP as we ride this contract to $4.00 by the end of this month. If you’d rather buy STLD options with lesser upfront risk, you may want to buy the STLD Jan 2015 25.000 call (STLD150117C00025000) at an asking price of $1.35.

Photo: Prabhu B Doss via photopin cc

— Daily Option Alerts

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