1 Magnificent S&P 500 Stock Down 40% to Buy Today
The most important aspect of the S&P 500 index (^GSPC 0.63%) that often gets overlooked is that the stocks are selected by a committee. The goal isn’t to create an index that represents the stock market, it’s to create an index that is representative of the broader U.S. economy.
The index is filled with large and important companies, which is why it is such an interesting starting point if you are looking for stocks to buy. One company that’s particularly interesting right now is a Dividend King that has fallen over 40% from its early 2024 highs. The best part is, the drop has nothing to do with poor execution. Here’s why you might want to buy this stock despite the big price decline.
What does Nucor do?
The S&P 500 index component in question here is Nucor (NUE 0.18%). It is one of the largest steelmakers in North America. Steel is a highly cyclical business that tends to ebb and flow along with economic activity. Steel demand and steel prices go a long way toward determining where Nucor’s top and bottom lines end up. Right now, demand and pricing have come down from historically high levels and investors are dumping Nucor’s shares.
That makes total sense for investors who think short term. However, Nucor thinks long term and views industry downturns as an opportunity to grow. Right now it is roughly two-thirds of the way through a $10 billion capital investment program. The long-term goal here is to produce higher highs and higher lows on the bottom line. Or, to put that another way, Nucor wants to come out of an industry downturn a better company than when it entered the downturn.
The success of Nucor’s approach is highlighted by its status as a Dividend King, with five decades of annual dividend increases behind it. You don’t build a streak like that by accident — it requires a strong business model that gets executed well in both good markets and bad ones. It is important to remember that this achievement has been reached despite Nucor operating in a highly cyclical industry, which makes being a Dividend King even more impressive.
The details matter with Nucor
What sets Nucor apart from most of its steel peers is, in fact, its business model. For starters, all of the steel it makes is made using electric arc mini mills, which make heavy use of scrap steel. These types of mills are more flexible than blast furnaces that make primary steel out of iron ore and metallurgical coal. Being able to ramp up and down more easily with demand allows Nucor to support its margins through the entire steel cycle.
On top of this, Nucor has made a concerted effort to shift into higher margin products. While it still makes commodity steel, it also uses its own steel to fabricate steel products that sell for more money and that tend to be less cyclical in nature. It has material operations making building products, for example. Having these businesses in the mix helps to enhance overall profit margins as well as protect the company somewhat from steel industry downturns.
One last issue is notable, too. Nucor has a rock-solid balance sheet. The company ended 2024 with a debt-to-equity ratio of roughly 0.33 times. That was the lowest of its closest peer group, giving it more leeway to deal with adversity and ample room to maintain its capital investment plans. All in, Nucor is a well positioned steel maker with a good business model and strong financial foundation.
Nucor looks like it is in the buying range
But when is the best time to buy a cyclical stock like Nucor? The answer is usually when the shares are deeply unloved on Wall Street, which is exactly where Nucor is today. As the chart above highlights, the current drawdown is pretty much on par with the deepest drops over the past 50 years or so. Could it get worse? Of course. But with a company like Nucor, it is often better to be about right than to miss the opportunity trying to wait for the perfect time to buy.