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The Fallen Case of Nucor


Stocks don't tend to discount forward as much as they used to.

Editor's Note: We noticed Nucor (NUE) performing well this morning yet the daily chart showed the stock following the 50 DMA downhill. We decided to ask Professor Udall his thoughts on this stock.

I follow Nucor (NUE) but don't like it as a long at all, though you can always catch upward bounces on former leaders. I would look to short on strength and pair the short against good values on the long side. I would say that former support levels have now become resistance levels as well. Mark them down and you should be able to fire off high probability short side trades with defined stops just in case.

From a longer term standpoint you could probably get short this name and stay short a long time and do very well. The only worry would be one more big spike in the steel/commodity group into the summer Olympics in China. This is a pretty well known story now so I'm not sure how much more of a lift this effect will have; however, stocks don't tend to discount forward as much as they used to. Given that, I think we have at least one more good lift closer to the games and into solid EPS reports.

I have a very strong bearish thesis on many of the former leaders (stocks, sectors), mainly in the commodity and energy camps. So NUE is on my short list with many other names of its like.

Lastly, NUE and other stocks like it are certainly dancing on the crest of peak earnings reports these days. This is that -- "the P/E is low so they don't need to grow much" justification. However, stocks in these groups don't go from peak earnings of $5 to trough earnings of $3, and then start growing again. The trough earnings have been and could be big losses and then you are valuing the business on net assets, LBO valuation, normalized "potential" earnings power and all sorts of nebulous concepts that we folks use to justify buying things we think are cheap and will eventually turn around. Many times we are correct on the turnaround, but the timing of when the numbers will improve is always tricky.

Case in point of that last sentence currently is what the homebuilder bulls are saying (have been saying). Eventually, these folks will be right, but it's hard to say when. Also, it's hard to say for sure what homebuilders are totally safe from a balance sheet perspective. I have a couple I like but I'm no where near buying any yet.

Coming back to NUE, looking at the chart you can always take a shot at a beaten up former leader as a bounce play... for when these types of bounces work, they jump pretty well. I see a defined sell point at the 200 day of $60 and just in case I would be a seller at $58 on any long side trade that works.
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No positions in stocks mentioned.

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