SLX - SLX: Steel Stocks Surge Since Early June Eyeing Further Upside

2023-07-27 03:51:55 ET

Summary

• Cyclical stocks, including those in the energy, financials, industrials, and materials sectors, are gaining strength, with the VanEck Steel ETF ranking first out of 37 in its sub class by Seeking Alpha’s quant rankings.
• SLX, a relatively small fund with $128m assets under management, offers investors one-trade access to the steel industry and global industrialization, with a high yield of 4.1% on a trailing 12-month basis.
• Despite potential volatility in the coming months, the fund has high relative strength, strong quant ranking.
• I spot a key level on the chart investors must monitor for clues on the next big move.

All of a sudden, cyclical stocks are coming on strong. Since the start of June, mega-cap tech and the so-called “Magnificent Seven” have taken a backseat to areas such as Energy, Financials, Industrials, and Materials. Within the Materials space, you will find steel producers. Once a popular ETF, then largely out of favor for years on end, the VanEck Steel ETF (SLX) is a focused fund with exposure to an area that has jumped in terms of relative strength against the broader market. In fact, the fund currently ranks as number 1 out of 37 in its sub class by Seeking Alpha’s quant rankings.

I reiterate my buy rating on SLX, and I spot a key development on the chart that investors should monitor for further potential upside.

SLX Surging vs S&P 500 Since Early June

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, which is intended to track the overall performance of companies involved in the steel sector. SLX offers investors one-trade access to the steel industry and global industrialization writ large. The ETF is cited as a pure play with geographic diversification and can be used to capture commodity exposure via equities in the ETF wrapper.

SLX is a relatively small fund with just $128 assets under management, but its dividend yield is high at 4.1% on a trailing 12-month basis. In terms of expenses, I see it as a moderately pricey ETF as its current expense ratio is 0.56%. It sports a 5-star Morningstar rating over the last 3 years, but tradeability and liquidity are not all that great in my view. The 30-day median bid/ask spread is lofty at 0.17%, so using limit orders when entering and exiting the fund is prudent. What’s more, the 30-day average volume is less than 50,000 shares, as of July 25, 2023.

Digging into the portfolio, data from Morningstar reveal that SLX is very much a value fund. Just 18% of the allocation is either blend or growth, and even there, it is small cap in nature, so there could be exposure to economic swings. The 26-holding portfolio features an exceptionally low price-to-earnings ratio of less than 8 while its price-to-book ratio is likewise cheap – under 1.

SLX: Portfolio & Factor Profiles

SLX is heavy into the Materials sector, as hinted at earlier, but there is also modest access to the value areas of Industrials and Energy. Also consider that just 56% of the ETF is invested in US-domiciled companies. Nearly one-fifth of SLX is made up of Brazilian firms – namely Vale (VALE). It is also key to monitor company-specific factors related to Rio Tinto (RIO).

Together, VALE and RIO make up more than 21% of SLX. Key risks include a slowdown in global growth expectations along with poor earnings results from some of the ETF’s biggest positions. A strong dollar would likely hurt the fund’s high non-US exposure as well.

SLX: Portfolio Positions & Dividend Information

Seasonally, cyclical steel producers tend to struggle from late July through early October, so the next two-plus months could feature some volatility, according to SLX’s 16-year track record per Equity Clock .

SLX: Bearish Seasonal Trends Into Early October

The Technical Take

With high relative strength, a strong quant ranking, and an inexpensive valuation, the technical chart shows promise, but we still must climb one more hurdle. Notice in the chart below that shares are working on an upside breakout from an ascending triangle pattern. The price target from such a breakout would be $95 based on the $46.50 to $70.20 range, with that difference added on top of the $70-$71 resistance point. Are we there yet? Not quite in my opinion. This is now the third try at climbing above resistance, and technicians are wont to say that there are no such things as triple tops (implying the third try for a breakout is the charm).

Still, I would like to see a daily or even a weekly closing price north of $71 to help confirm the bullish advance. For now, it is promising, but we need the bulls to carry home the torch. I like how the RSI momentum indicator at the top of the chart is notching a new high, as that suggests price should follow before long. Also, the long-term 200-day moving average is now upward-sloped, indicating the bulls are in charge. Overall, it’s a favorable setup.

SLX: Bullish Ascending Triangle, On Breakout Watch

The Bottom Line

I reiterate my buy rating on SLX. There have been key technical developments, and the fund remains a great value along with boasting a strong dividend yield.

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