Steelmaker has the tools to succeed

Steelmaker Nucor (NYSE: NUE) recently reported a mixed bag of first-quarter financial results. However, much of that is out of the company’s control and simply tied to the current market environment. Reflecting the weak market, revenue and earnings dropped by 14 percent and 40 percent, respectively, compared to year-ago levels.

On a more positive note, with steel prices down due to global overcapacity and heavy import pressure, scrap prices fell 19 percent. That’s good, because Nucor buys a lot of scrap metal to recycle.

While the U.S. government took some steps in 2014 to level the playing field, it’s clear that Nucor and other domestic steelmakers will have to vie with imports for the time being. Fortunately, Nucor can operate profitably even at these challenging levels.

Demand for steel in nonresidential construction is growing. This segment has been depressed since the 2008-09 financial crisis and is only beginning to recover. The low price of oil has reduced drilling activity, though, and along with it, demand for steel and pipes.

Nucor remains one of the best-run steelmakers out there, but there’s no getting around the cyclical weakness in the market today. Still, with a recent price-to-earnings (P/E) ratio of 21, well below its five-year average, and a dividend that recently yielded 3.1 percent, Nucor stock is appealingly priced and offering significant income for patient believers. (The Motley Fool has recommended Nucor.)

Ask the Fool

Q: How does a stock’s price change sharply overnight, when the market is closed? – P.V., Honolulu

A: It doesn’t matter that shares aren’t trading hands. What really sets the price of a stock is the perceived value of the company. Imagine that shares of Big Bangs Salon (ticker: BZNGA) are at $50 when the market closes one day. That evening, the company reports blowout growth numbers for its sales and earnings. When trading resumes the next morning, the stock price isn’t likely to open at $50 and then creep up slowly.

Instead, it will probably just begin trading at a significantly higher level. That’s because many investors are now assigning a higher value to the company, and the limited existing shares have risen in value to meet the higher demand. Buyers are simply willing to pay more for the shares. The opposite happens when a stock is viewed less favorably.

My dumbest investment

My wife and I wanted to buy a McMansion. We did, only to learn later that real estate may not really hold the value that you think it will. We sold at a big loss. – A.D., online

The Fool responds: There are certainly some people whose homes appreciate greatly in value over the years. But many other people sell for a loss or simply don’t make much over many years. Since World War II, home prices have averaged annual growth of about 5 percent, which, adjusted for inflation, is closer to 1.5 or 2 percent annually. To make good money, you need to be in the right place, at the right time – which is hard to do.

That’s not to say that we shouldn’t buy homes. They’re great for providing comfort and shelter and raising families. Just don’t think of your home as a money-making investment, because over long periods you’re likely to make far more money in other investments, such as stocks. Stocks have averaged close to 10 percent annually over many decades, or about 7 percent adjusted for inflation.