How to Buy Steel Dynamics (STLD) Stock

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Contributor, Benzinga
July 22, 2020

The industry of steel took a huge hit in March and April 2020 as the coronavirus decimated supply chains around the world. Steel Dynamics fell from highs of $35.78. It never quite hit stocks under $10 status, but it got very close with a 52-week low of $14.98.

The upside of Steel Dynamics is certainly attractive. With a price-to-earnings (P/E) ratio that is below the S&P multiple, many technical traders see a buy as a no-brainer. Steel Dynamics also has the added protection of relatively low debt and a solid cash flow. But the world is changing around the company as well. There may be a much smaller need for the traditional supply chain in a remote, socially distant post-COVID world.

How to Buy Steel Dynamics (NASDAQ: STLD) Stock and Options

Steel Dynamics will benefit from a return to the status quo after a COVID vaccine or a reopening of international travel. If you believe in this result, you can get involved with STLD through direct buys, options, or industry-specific mutual funds and exchange-traded funds (ETFs).

Regardless of your choice, you should access Steel Dynamics from a reputable brokerage. Avoiding slippage or input errors in your order execution ensures that you get the investment you want and pay the least amount of money for it. We will discuss buying options here because of its relative difficulty compared to other types of investments.

Pick a Brokerage

As an established NASDAQ stock, Steel Dynamics is available through all mainstream brokers. You should be able to buy it without any added commission.

Because you can choose from virtually any broker, you can focus on the broker with the best interface and safest process. Make sure your broker is properly regulated through a well known financial authority to protect your investments. This is especially important when purchasing options, which are more volatile than stock or ETF investments.

Choose Strike Price

Call options rise with the price of Steel Dynamics. Buy call options if you believe that the price is currently too low. Every call option controls 100 shares of STLD and represents a contract to “call” shares away from an options writer at a strike price on a certain date. If the price of STLD is equal to or above the strike price on the expiration date, the call option contract will execute. 

The first aspect of trading into STLD options is to decide on a strike price. If you choose a Steel Dynamics call option at a strike price of $20, you will own 100 shares of Steel Dynamics at $20 if the price is at or above $20 on the expiration date. If the price is less than $20 on the expiration date, the option is “out of the money” and will not execute. The value of the option at that point is 0.

You can find strike prices in option chains that your broker lists.

The value of call options move in tandem with the price of STLD, but they move faster. For instance, if Steel Dynamics goes up 3% in 1 day, a call option may gain 30%.

Choose Expiration Date

The expiration date is the last day of your call option contract. This is the day that the option’s time value becomes 0. Any value it retains will be intrinsic and based on being “in the money.”

Pick your preferred date based on how long you wish to hold the contract.

Decide How Many Contracts

The last value you will consider in your option order is the number of contracts you want to buy. Choose the number of contracts based on the number of STLD shares you want to control.

Watch Stock Price

The volatile nature of stock options means that you will want to watch the price of Steel Dynamics closely. Because the steel industry is under the microscope, STLD is often among the strong premarket movers. You can buy shares premarket, but not call options.

Steel Dynamics Stock History

Steel Dynamics was founded in 1993 on the basis of bringing mini-mill technology to the mainstream. It quickly expanded through capital investments and acquisitions. The estimated output of the company is around 11 million tons. Steel Dynamics also dedicates itself to monitoring its environmental output, spinning off one of the biggest recycling companies on the continent. Steel Dynamics is currently in the Fortune 500 and employs around 8,000 people.

Despite its solid balance sheet and diversified production capabilities, the coronavirus hit the Steel Dynamics stock price hard. Although outlooks did not change much, it was one of the better-known stocks under $20 in Q2 2020 before recovering to just under $30 in June.

Pros to Buying Steel Dynamics Stock

Steel Dynamics is still one of the more attractive stocks that took a hit during the coronavirus.

  • Resilience: Although the stock price fell in March and April 2020 (like everyone else), Steel Dynamics was really never in danger of becoming one of those penny stocks under $5. The company’s facilities and outlook remain strong, pointing to undervalued pricing that could benefit investors willing to look past today’s pricing.
  • Diversified interests: Steel Dynamics quickly diversified itself beyond mini-mill technology into bar products. It is known for excellent customer service, which breeds loyalty in important supply chains that will return after the coronavirus passes.
  • Upside potential: STLD is currently trading under 50% of its all-time highs.

Cons to Buying Steel Dynamics Stock

Although the company is strong, the world may change around the company enough to warrant a second opinion on an immediate buy.

  • Uncertainty: No one knows when production chains will return. Although there is good news about a vaccine, the U.S. continues to post record highs in coronavirus cases. A second wave could keep manufacturing down and punish the steel industry.
  • An inability to change: Steel Dynamics has innovated in its space during the 1990s and 2000s, but this is not indicative of future performance. Smaller, more regional companies have the potential to usurp market share through more agile production and distribution processes. 
  • Unsustainable returns: Steel Dynamics has enjoyed 35% returns over the past 5 years. This is great news for people who owned the stock in the past 5 years. Investors in the future may punish the stock if it posts returns below this level.

As Resilient as Steel

Steel Dynamics is certainly in a good position and has shown amazing resilience to the worst pandemic in the modern era. If you think we will eventually come out of the coronavirus, then STLD may be a good pick for long-term viability. If you’re looking for something quick, you may get disappointed in the short term. Make sure you know the reason for your buy before you commit yourself to any stock, even strong performers like STLD.