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The Return of Steel Stocks

Wednesday, 26 Mar 2008 | 6:45 PM ET
Steel Resurgence
The domestic steel industry used to be a joke, but now its stocks are reaching 52-week highs as we head into a recession. Mad Money's Jim Cramer shares his favorite steel picks.

Steel was the talk of the day on Wednesday, during Cramer’s Back to School Tour stop at Penn State University. The topic choice won’t come as a surprise given that Pennsylvania’s always been linked with the industry, but most in attendance – or watching at home – probably didn’t know that American steel companies are experiencing a renaissance right now.

Steel used to be a dominant U.S. industry, but between 1999 and 2003 about 32 domestic companies filed for bankruptcy. The 12 steel companies on the Dow during the 1980s whittled down to none and only three major players were left in the States: U.S. Steel , AK Steel and Nucor . But the consolidation and the reduced capacity that followed this downturn is exactly what’s fueling steel’s rebirth, Cramer said.

The countries – Russia, Brazil, China, India – that once would have flooded the U.S. market with steel are keeping it for themselves, leaving the companies here at home with less competition. Higher transport costs, the weak dollar and export taxes have helped in that regard, too.

And some of these countries can’t satisfy their own demand. China and the Middle East need so much for building that they offset any recession-caused decline in the U.S. Actually, the U.S. is dealing with its own undersupply as well. But the high barriers to entry for foreign steel are keeping American businesses strong.

Cramer also said the consolidation in the steel industry, especially globally, might not be over. So more acquisitions in this space mean every U.S. steel company should trade at a takeover premium.

But as much as Cramer said he likes the steel sector, the stocks are too expensive right now. Potential investors should wait to buy. Historically these stocks are sold at the slightest sign of trouble, so finding a buy-in opportunity is only a matter of time.

Watch the video for Cramer's take on Posco and whether demand for aluminum will ever overtake steel.

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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