Description

Nucor

Description

First a brief disclaimer: this is a trade on the current political situation, but I am not a political person. I think it is very important to always stay objective. Therefore, this writeup is not about whether this upcoming election will be good or bad for the country, but instead is just a way to profit on current events. Thank you for understanding and commenting accordingly.

With that out of the way, the tragic and horrible shooting at the Trump rally in Pennsylvania has greatly raised the odds of a GOP sweep in November. There are multiple Trump trades out there, but many of them have already at least partially priced in a Trump victory and are higher risk at this point. Looking around for a way to profit on the events of the weekend, Nucor stands out as a compelling and asymmetric trade with good upside and minimal downside risk. Nucor offers a setup where expectations are very low, the margin of safety is high, and a GOP sweep would create real benefits and upside for the company. At the same time, no one has been talking about Nucor as a Trump trade, adding further to the margin of safety.  I will provide a brief overview of both Nucor and why the US has a good chance of exiting 2024 with a government where all three branches are controlled by one party.

Nucor Corporation Overview

Nucor is the largest steel producer in the United States. It’s one of the main suppliers of rebar in North America and is the largest scrap recycler. I don’t want to get too far into the operational weeds, as it’s not a big part of the thesis, but going over the margin of safety is important: first, expectations are very low here. Earnings are coming up on July 22^nd, but on June 14^th Nucor already preannounced EPS of $2.20-$2.30 vs estimates of $3.06. The stock price was essentially unchanged despite the large miss.

Putting aside the low expectations, fundamentals are also supportive of a low-risk stock. NUE has only one 5% customer, and a robust capital return program. Nucor plans to “return at least 40%” of their net income to shareholders. Currently, Nucor pays a (small) dividend of $0.54 per quarter, and as of YE23 had $3.32bn remaining on their stock repurchase program vs the market cap of ~$38.6bn. The balance sheet is robust, with a debt to total capital ratio of 24%. Finally, this is a trade with a short-term catalyst. November elections are rapidly approaching, and therefore there will be no need to hold Nucor for years waiting for some nebulous thesis to play out, which further minimizes any potential risk.

The State of Play on the Political Side

Now let’s examine the political landscape. Obviously, the Democrats have been in disarray since Biden’s disastrous debate performance in June while the GOP has mainly been watching them struggle. Now, I think the horrific attack on Trump could really motivate Republican voters at the same time the Democrats are floundering. This could open up an unusual participation gap between the two parties. Regardless of whether the Democrats replace Biden or not, the dynamics for both parties are unlikely to change. This really raises the odds of a GOP sweep and is what makes this Nucor trade suddenly so compelling.

For the presidency, there are of course many polls showing Trump with an easier path to victory than whoever the Democratic candidate ends up being. Project FiveThirtyEight does a nice job amalgamating this: https://projects.fivethirtyeight.com/polls/president-general/2024/national/

Regarding the Senate, it is effectively split 50-50 between the Democrats and Republicans (or will be once Joe Manchin (D) retires. Here, there are 34 seats on the ballot this year, only 11 of which are held by Republicans. This puts the Democrats very much on the defensive, especially considering that two of their 23 seats are in Montana and Ohio, states that likely vote red this cycle. Finally, if Trump wins the presidency, even a 50-50 split would lean Republican, as the vice president gets to vote as a tiebreaker

In the House, every one of the 435 seats are in play. Republicans currently have a 218-213 majority, so the Democrats would need to pick up five seats to win the majority. Currently, only 22 seats are listed as “toss-ups” and recently whichever party that has won the presidency has also done well in the House. If the Democrats remain in disarray, and the Republicans are galvanized by this weekend, it seems quite likely that the GOP could remain in control of this branch as well.

I am not a PolySci major and I don’t want to come across as if I have my finger on the pulse of what every American voter will do. We’re obviously in a period of great uncertainty with ‘once in a lifetime’ events seemingly happening every month. Having said that, I think the above points show that the Republicans have a real chance (50%+) at a sweep. The photo of a bloodied Trump under the American flag can’t hurt.

Policy Ramifications post-Election

Assuming that the GOP sweep does come to fruition, there are numerous policies that will benefit Nucor. The first major issue that will be front and center is the debt ceiling.

The debt ceiling will be an immediate problem as the federal government will have to return to ‘extraordinary measures’ to avoid default starting January 1^st 2025. It’s impossible to predict exactly when the government will no longer be able to meet its obligations, but it would trigger roughly mid-year. In the past, the Republicans have used this issue as a stick to cut or restrain funding, which would not be the case if they control all three branches and should lead to further government spending.

Although the debt ceiling is one of the first policies that will need to be addressed, there are a myriad of other likely Trump policies that would benefit Nucor. We all remember his first term, which included strong-arm trade policies such as renegotiating agreements and lots of tariffs. Based on his campaign rhetoric, this theme will continue.

Other policy changes would likely include further deregulation. Nucor has had several clashes with the EPA in the past, for example, but the deregulation should also benefit Nucor indirectly by enabling more building projects to get done, boosting demand for steel.

Trump has also mentioned support for American manufacturing numerous times. As with deregulation, anything that boosts industrialization and manufacturing in America will benefit Nucor both directly and indirectly.

In summary, the events of this weekend have greatly raised the odds of a GOP sweep in November. Nucor is an overlooked stock that would be a beneficiary of this outcome, while offering minimal downside risk. If the red wave doesn’t materialize, one should be able to terminate the trade mid-November around these levels due to the low expectations. If the Republicans do end up in a position to enact their policies, Nucor should at a minimum retest its 52-week highs around $200

Catalyst

Catalyst: The odds of a unified three-branch Republican federal governemnt is much higher than it was 48 hours ago. In this scenario, Nucor is an overlooked beneficiary with good upside. A high margin of safety and low expectations minimizes downside in other outcomes.