Unusual Trading Volume in Gerdau: A Signal for Buyers?

Key Points

• Price action following the U.S. presidential elections has a lot to reveal to investors, especially regarding where the market thinks certain stocks will go.
• A steel maker stands out in Brazil as having above-average volume and price action. It turns out it is filled with fundamental tailwinds.
• Wall Street analysts rightfully see a double-digit upside in this name for the coming quarters, and so do bearish traders.

When stocks move exponentially, there are typically two major forces at play behind the move. One of them is momentum, but that can only be made possible through enough volume pressure to get the stock to move in the first place. This is why, today, spotting unusual trading volume on specific names is one of the best ways to land on new opportunities.

In the days following the United States presidential election results, one stock in a particular sector saw some interesting volume and price action. That stock is basic materials company Gerdau NYSE: GGB, a Brazilian steelmaker that rallied by over 10% in a single day after the election results came out. That price action, however, is directly linked to similar optimism spotted in the broader Industrials Select Sector SPDR Fund NYSEARCA: XLI.

While most markets and asset classes saw bullish price action in the days following the election, the fact that steel makers and industrial stocks reported the best results means something for investors. The implications may be that a new administration and its policies on employment and trade tariffs will create an interesting situation for these names.

Gerdau Stock Gains Interest Amid Potential China-U.S. Tariff Developments

The volume for Gerdau stock is an average of 7.5 billion shares per day. The morning after the election, over 15 billion shares were traded. This new interest in the stock could be attributed to the potential tariffs the United States is looking to place on Chinese exports.

This means that, as China seeks a better trade partner, Brazil could potentially be interested in taking some of the trade market share. Investors need to remember that the Chinese government has recently boosted its economic stimulus measures to bring the nation out of its multi-year bear market.

New stimulus and a heating economy might increase demand for the same basic materials that the U.S. is attempting to place tariffs on. So, with new demand and less supply, stocks like Gerdau might come into play.

Can Gerdau Stock Deliver Wall Street's Double-Digit Upside Target?

Even though the stock has rallied substantially over the past week, some on Wall Street still think it can deliver a double-digit rally from where it trades today. Those at Bank of America and J.P. Morgan Chase had a similar view of the company.

With a price target of $5 a share for Gerdau stock, these analysts are now calling for up to 40.1% upside from where the stock trades today, a significant upside potential considering the stock trades in an overseas market. While it might seem bold, investors can look at other metrics that would come to justify the sort of upside in Gerdau today.

Compared to the rest of the materials sector, Gerdau stock trades at an attractive discount, especially on a price-to-book (P/B) basis. While the materials sector trades at an average of 3.6x today, Gerdau stock has yet to catch up as it only trades at a 0.8x valuation, which is a discount to the sector and the company’s book value itself.

Price action in other stocks can reiterate the bullish views and sentiment currently spreading in Gerdau.

After also reporting higher-than-normal trading volume in the days following the election, shares of Stellantis NYSE: STLA became a target of interest for those following this potentially bullish trend for the industry.

Knowing that the two might be connected—an automaker with European and Asian exposure and a Brazilian steel maker looking to fill the gap in China’s trade needs—short sellers decided to step away from the battlefield when it came to Stellantis stock.

Investors can see this at play through the company’s plummeting short interest, which fell by as much as 22.6% over the past month alone. These signs of bearish capitulation in a stock connected to the potential rise of the industrial sector could connect the dots with Gerdau’s upside potential.

In case learning with China goes wrong, Gerdau’s management has also decided to hedge their bets by increasing their U.S. factory presence. By having such presence and exposure, these tariffs will, in fact, increase the profit potential for Gerdau, as it can now sell its steel at higher prices and margins.

Whichever way investors want to look at the global landscape and incoming changes in trade, Wall Street analysts seem to have their ducks lined up in a row when it comes to Gerdau’s upside projections and potential, a proposition that investors should seriously consider in the coming quarters.