SLX - SLX: Global Growth Enough To Support Steel Stocks

2023-04-04 09:16:32 ET

Summary

• The March U.S. ISM Manufacturing number did no favors for the 'no recession' camp.
• Still, economically-sensitive stocks are holding their own, and I see many global steel equities in the SLX ETF as attractive on valuation.
• I lay out key price levels to watch on this high-yield, strong-momentum fund.

Pick your narrative. We have rebounding growth features in Europe and Asia, particularly China, while the domestic economy just printed its worst ISM Manufacturing number since mid-2020. Few industries are tied more to the strength of manufacturing like steel companies.

The VanEck Steel ETF (SLX) has been consolidating for the better part of two years, and I see shares as a buy today based on valuation, but there is a key price level to monitor.

SLX: Bouncing Back Along With China

According to the issuer , SLX seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Steel Index (STEEL), which is intended to track the overall performance of companies involved in the steel industry. The fund includes companies involved in a variety of activities related to steel production, and it is a way to get exposure to a slice of the Materials sector.

SLX features a 30-day SEC yield near 3% but has a somewhat elevated 0.56% annual expense ratio. With just $129 million of assets under management, the fund has been around quite a while – debuting back in the steel and commodities heyday of 2006.

The ETF is concentrated with just 26 total equities and the fund rebalances quarterly. Tradeability can be sketchy at times with SLX, so I recommend using limit orders when trading the fund – the 30-day median bid/ask spread is 0.13% while volume is a smidgen more than 56,000 daily.

Digging into the portfolio, data from Morningstar show that SLX is solidly in the value style and mixed across the market cap spectrum. So, as yields fall while inflation fears rise, the fund should outperform. But when global growth risks mount, expect this cyclical niche to struggle. What I like about SLX right now is its strong momentum and high yield .

The fund trades with a single-digit P/E multiple per Morningstar, while long-term earnings growth is not all that strong near 5%, but with ample cash flow growth, future earnings may be on the mend. Overall, I like the valuation and yield with SLX right now.

SLX: Portfolio & Factor Profiles

The top three stocks in SLX represent more than a quarter of the fund. Thus, monitoring trends in Vale (VALE), Rio Tinto (RIO), and Nucor (NUE) is key. More broadly, there is some geographic diversification with SLX as half the portfolio is U.S. while Brazil along with some European nations are material chunks of the fund. But almost all assets are included in the small Materials sector.

SLX: Country & Sector Breakouts

Seasonally, SLX tends to have a peak in late April and early May, with a general trend lower thereafter through early October. So, while this month is often bullish, if we do see a rally, data from Equity Clock suggest that taking profits may be the prudent play.

SLX Seasonality: Bearish Trends Early June-Early October

The Technical Take

I like the long-term setup with SLX here. Notice in the chart below that the fund is putting in a bullish rounded pattern that, if broken out from, would have a measured move price target to the mid-$90s – that would be the highest price since early 2008.

Near-term, a bearish RSI momentum divergence resolved with the fund revisiting its flat 200-day moving average. That came after a bullish divergence around a double-bottom low in the mid-$40s. Long here with a stop under $56 appears as a decent risk/reward.

SLX: Bullish Rounded Consolidation, Eyeing $71

The Bottom Line

I like the valuation on SLX despite a slowing domestic economy. Global growth could pick up the slack, and a weaker USD would be a tailwind for most Materials sector stocks. A breakout above the low $70s would help send this high-momentum fund to multi-year highs.

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