Man of Steel: Two Stocks with Over 20% Upside, Says Goldman Sachs
2min read Steel may not have a caped superhero, but it plays a vital role in powering economies and building infrastructure. Goldman Sachs analyst Mike Harris predicts a favorable outlook for the U.S. steel industry, citing cyclical factors, such as an expected Federal Reserve rate-cutting cycle and steady steel demand, alongside structural factors like potential increased fiscal spending in a second Trump presidency. These dynamics position the sector for significant earnings growth.
Here are two standout stocks in the steel industry that Goldman Sachs believes have over 20% upside potential.
1. Cleveland-Cliffs (CLF): A Comeback in the Making
Cleveland-Cliffs, North America's largest flat-rolled steel producer, has faced a challenging year with its stock down 40% year-to-date. However, Mike Harris sees this as an opportunity, pointing to the company's ability to implement strategic initiatives that could drive a turnaround.
Harris outlines three key reasons for optimism about CLF:
Cost Control: The company has made significant strides in reducing costs, including a $40/metric ton cost reduction in Q3 2024.
Earnings Growth Potential: Successful completion of value-enhancing projects at key facilities—Middletown, Butler, and Weirton—could contribute an additional $600 million in annual earnings.
Margin Expansion: Harris anticipates a margin improvement of approximately 410 basis points through 2026, supported by $120 million in synergy benefits from the Stelco acquisition.
Goldman Sachs assigns a Buy rating to CLF with a price target of $16, representing a potential upside of 24% over the next year. Wall Street analysts share a similar sentiment, with an average price target of $15.96.
2. Nucor (NUE): Leveraging Market Leadership
Nucor, the largest steel producer in the U.S. with a market cap of over $36 billion, has also experienced headwinds this year. Its stock is down 20%, underperforming the S&P 500, due to declining steel volumes and lower average prices.
Despite these challenges, Nucor delivered better-than-expected Q3 2024 results, with revenue of $7.44 billion (beating forecasts by $210 million) and non-GAAP EPS of $1.49, exceeding estimates by $0.08.
Mike Harris highlights several factors that make Nucor a compelling investment:
Market Leadership: Nucor is well-positioned to benefit from rising steel demand, especially from rapidly expanding sectors like data centers.
Margin Growth: Harris projects a 260 basis point margin improvement by 2026, driving a compound annual growth rate (CAGR) of 15% for EBITDA.
Robust Financials: Nucor boasts a strong balance sheet with leverage below 0.2x, giving it the flexibility to pursue growth opportunities.
Goldman Sachs gives Nucor a Buy rating with a price target of $190, implying a 12-month upside potential of 22.5%. Other Wall Street analysts have a slightly lower consensus price target of $180, still reflecting a 16% upside.
Conclusion: Steel Stocks with Strong Tailwinds
Cleveland-Cliffs and Nucor are uniquely positioned to capitalize on a favorable macroeconomic environment and growing steel demand. Cleveland-Cliffs offers significant upside through cost control and project execution, while Nucor leverages its market leadership and financial strength to drive sustainable growth.
For investors seeking exposure to the steel sector, these two stocks could offer substantial returns as the industry's cyclical and structural drivers gain momentum.
