The stock market is where people or the public buy and sell stocks to earn money. For others, it is the marketplace to build a financial portfolio and create long-term wealth. But the key to success is understanding the market, especially its behaviour.
Stock prices aren’t fixed but frequently move up and down, and sometimes spikes are massive, and drops are sharp. Because this movement is normal, no one can assume a stock that has done well in the past will do well tomorrow. Hear it from the market veterans, “Past performance is no guarantee of future results.”
You can lose money in a declining market, but a downturn isn’t necessarily bad. Some investors take advantage of falling prices and realize a considerable windfall when the stock recovers. For example, Stelco Holdings (TSX: STLC) is a low-performing stock today but a buying opportunity. Investing in this Canadian steel company could make you a millionaire one day.
Image source: Getty Images
Nation building
Stelco was formed in 1910, an era of change in Canada in which the founders created a path toward nation-building through steelmaking. According to management, this forward-thinking vision is why Stelco maintained resiliency through the years if not generations.
The first few years of operations were challenging, but Stelco established a quality-driven formula early on, and it became the foundation of enduring customer trust. Furthermore, it survived World Wars and the Great Depression of the 1930s.
The $2.2-billion company currently boasts facilities with leading edge technologies and is producing next-generation, custom-engineered products that address customers’ needs.
Temporary weakness
Stelco investors are down 21.2% year to date, although at $39.54 per share, the 4.25% dividend compensates for the temporary weakness. The stock’s trailing one-year price return is -15.9%, which isn’t alarming. Had you invested three years ago, your overall return would be 116.4% in 2024 or a 29.3% compound annual growth rate (CAGR).
Regarding dividend safety and the payout frequency, Stelco’s payout ratio is a low 40.3%, and the company pays quarterly dividends. The dividend policy also changed from annual payments in November 2021 to quarterly in March 2022.
Financial performance
In the three and nine months ending September 30, 2023, revenue, operating income, and net income were lower compared to the same periods in 2022. After the three quarters, the year-over-year declines were 17% to $2.3 billion, 69% to $325, and 82% to $174 million, respectively.
Stelco’s Executive Chairman and CEO, Alan Kestenbaum, said, “We are pleased with this quarter’s results despite a relatively weaker pricing environment that existed this quarter. We have built a business that generates significant cash which in turn has allowed us to deliver industry-leading returns to shareholders,” he adds.
Kestenbaum referred to the Board-approved special dividend, despite the unimpressive financial results in Q3 2023. The reward was in addition to the regular quarterly dividends. Meanwhile, management will focus on cost reductions, operation efficiencies, and lower inputs to sustain strong cash flows.
Eventual recovery
Stelco is facing challenging times but the stock should recover eventually when the economic cycle returns to normalcy. Also, the company is in a solid financial position with over $1 billion in total liquidity ($841 million in cash). Kestenbaum expects improved results starting in 2024 given the rising steel prices and continued solid market demand.
