Tuesday's IBD 50 Stocks to Watch pick, Commercial Metals Co., is one of many steel stocks worth tracking as CMC approaches a buy point.
CMC stock bottomed out at 31.47 in mid-July and closed the month with a gain of nearly 20%.
Price action built the right side of a double-bottom base during the last two weeks of July. It broke out from the base's 42.99 buy point on Aug. 10 but struggled, failing to clear the 5% buy zone as a result of broad market weakness.
CMC stock is selling off again on Tuesday, pressured by bearish macro forces. Shares are trading just below support at their 21-day exponential moving average.
Today's loss of 3.5% puts CMC stock very close to the 7%-8% sell zone.
In late July, CMC stock reclaimed all three key moving averages, including the 21-, 50- and 200-day lines. In addition, the steel stock's relative strength line has been recovering in recent weeks and appears to be near a new high.
The stock has been under accumulation in recent quarters, which is a bullish sign, while showing rising mutual fund ownership. Total ownership rose to 640 funds in the most recent quarter, up from 632 in the prior quarter.
Steel Stock: Blowout 2022 Earnings
The Irving, Texas-based Commercial Metals manufactures, recycles and markets steel and metal products in North America and Europe. The North American business, which is a network of recycling facilities, steel mills and fabrication operations, produced roughly 84% of total revenue in the most recent quarter. Europe accounted for 16%.
CMC stock's metal fabrication industry group ranks No. 17 among IBD 197 groups.
This sector has shown increasing strength in recent weeks as a number of metals stocks have formed constructive patterns with valid buy points. The other plays include Nucor and Steel Dynamics.
However, there are risks in owning this volatile sector.
For starters, Wall Street analysts are worried that the market is oversupplied after the buildup from the Covid-19 pandemic.
This suggests little pricing strength for steelmakers in fiscal 2023 and 2024. In fact, analysts are now predicting a 35% year-over-year EPS decline next year.
On a more positive note, 2022 earnings are expected to rise an extraordinary 151% to $8.86 per share while full-year revenue grows 33% to $8.9 billion, according to FactSet.
The steelmaker has averaged earnings growth of 154% over the past three quarters and surprised investors on June 16, beating estimates by a wide margin. Analysts had expected May-quarter earnings of $1.85 per share, but the company hit a home run, reporting $2.61 per share on $2.53 billion in revenue.
