I’ve held shares of Nucor (NYSE:NUE) for over four years now. With returns of 170% since then, is it time to sell the oldest holding in my Stocks and Shares ISA, or is there more growth to come?
What does it do?
Nucor is one of the largest steel producers in the US. The company has a strong track record of profitability and dividend growth. It appears well-positioned to benefit from the long-term growth of the steel industry.
I have owned shares in the company since 2019. With steady growth since, I am considering the pros and cons of maintaining my position as part of my Stocks and Shares ISA.
Should I keep my shares?
- Strong track record of profitability: Nucor has held a strong record since 1973. With a clear focus on efficiency and cost control, it maintained profitability even during periods of economic weakness. Earnings have grown by 41% in recent years, with a net margin of 17%.
- Dividend growth: Nucor has increased its dividend for 50 consecutive years. The company’s dividend yield is currently 1.23%. This is not necessarily high, but growing steadily.
- Well-positioned for growth: The steel industry is expected to grow in the long term. This is due to the increasing demand for steel from infrastructure projects, the automotive industry, and the renewable energy sector.
- Stability: Despite uncertainty in the wider markets, the demand for Nucor’s products and services is consistent. This is due to the long lead-in time for construction projects. As a result, the share price rarely fluctuates by more than 5% weekly, below the sector volatility average of 7%. This reliability is often valued by passive investors.
Time to sell?
- Valuation: Following the recent growth, Nucor shares may now be overvalued. The price-to-earnings (P/E) ratio of 6.1 times is slightly above the sector average at 5.9 times. A discounted cash flow calculation suggests the shares may be 99% overvalued.
- Cyclical industry: The steel industry is cyclical, meaning that it is subject to periods of boom and bust. Expected earnings over coming years are down 35%, indicating uncertainty about whether growth seen in previous years can continue.
- Environmental concerns: The steel industry is a major emitter of greenhouse gases. Nucor is working to reduce its environmental impact, but this could affect its profitability in the short term.
- High debt levels: Nucor has a high debt level, which could make it vulnerable to financial distress during a downturn. These levels are sustainable at present, but if the economy declines further, investors may begin to worry.
- Insider selling: The management team of Nucor have been selling millions of dollars worth of shares in recent months. This may be unrelated to future confidence, but without insider buying in the same time period, it is not inspiring.
Will I keep it?
Since I first bought Nucor for my Stocks and Shares ISA, the shares have performed well. The company is well-positioned to benefit from the long-term growth of the steel industry. However, the steel industry is cyclical, and I do not want to be caught up if investor sentiment changes. I will be gradually selling the shares, and putting my money to work in more undervalued areas.
