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According to Fortune, steel prices soared in 2021 as it remained one of the most in-demand products among manufacturers in the third quarter. Industrial activity and the rush to rebuild supply chains post-pandemic pushed prices higher, so much that "Steel inflation has been 150% since before COVID…And that's extraordinary. It's unprecedented as far as I can remember," said Steelcase CEO Jim Keane in September." I believe there continues to be opportunities to capitalize on steel companies that come at a discount, which is why U.S. Steel (NYSE:X ), Vale (NYSE:VALE ), a nd Nucor Corporation (NYSE:NUE ) are considered strong buys.

Passage of the 2021 Infrastructure Bill will fund roads, bridges, ports, and waterways in rebuilding, repairing, and modernizing U.S. transportation systems. As global economies are built on steel, long-term demand continues for the metal, which is why I’ve selected three steel companies at great valuations that should benefit from continued manufacture and construction as well as rising steel prices.

In addition to the passage of the Infrastructure Bill, which should pose tremendous benefits to boost the industry, on Jan. 1, 2022, the U.S. lifted EU steel and aluminum tariffs to allow for tariff-free exports into the U.S. In addition, with Japan being the fifth largest exporter of steel, which remains subject to a 10% tariff, the U.S. and Japan also plan to end the 25% Section 232 tariffs on steel imports from Japan. This should benefit the sector, which I will discuss later in the article.

Steel demand depends on economic activity. Steel provides the raw material for many industries, with construction and transportation leading the way. Automobile and railway consumption are at the top of the list. As we’ve seen lately, a growing economy, especially with global reopening occurring post-COVID-19, gives way to people driving, building homes, and using heavy machinery – a greater need for steel.

With the Fed set on tightening monetary policy to cool down the overheating economy that may cause contractionary pressure and curve inflation, one must wonder how much runway commodities like steel has. We’ve already seen steel prices in 2022 experience some decline. If the Fed is too aggressive, it can cripple demand. Tightening too quickly and getting too aggressive may prompt the economy to stop spending. The market already indicates it's behind the curve and may overreact, and therefore this can cause downward pressure. But given increased spending in infrastructure, a revival in construction, mining, and the automotive industry, I believe this sector is poised for a rally in 2022.

U.S. Steel has a long history dating back to 1901 and was once the largest steel producer globally, a producer of flat-rolled and tubular steel products, X offers slabs, strip mill plates, tin mill products as well as iron ore.

U.S. Steel has a stellar valuation and is trading at a steep discount, an A+ overall grade, and on most valuation metrics. X’s forward P/E ratio of 2.25x is nearly 85% below the sector, and forward EV/EBIT is -82.36%. U.S. Steel comes at a nice discount given that the overproduction of steel led to X’s price decline of more than 20% over 10 days at the end of January 2022. Inventory buildup leads to price correction. The hot-rolled coil was trading at $1,970/ton with 6-8 week lead times in September 2021, vs. $1,200/ton with 3-4 week lead times on Jan. 26, 2022, but the stock has since rebounded.

With several potential projects in the pipeline following the passage of the Infrastructure Bill and the recent removal of tariffs in overseas markets like Japan and the E.U., I see great potential for this stock pick. Having a 1.71x EV/EBITDA (forward) multiple which is 78.21% discount to the sector substantiates this stock is significantly undervalued. While I’ve not seen the Fed rate hikes factored into the valuation at this time, U.S. Steel’s share price will be tied to the pricing of steel and steel products going forward.

X VALUATION GRADE (Seeking Alpha Premium)

In addition to eliminating some of the friction between allies, the nations can address the reduction of carbon emissions while better competing against foreign rivals. "The agreement ultimately to negotiate a carbon-based arrangement on steel and aluminum trade addresses both Chinese overproduction and carbon intensity in the steel and aluminum sector,'' said White House National Security Adviser Jake Sullivan.

Elimination of tariffs in the E.U. will help eradicate retaliatory tariffs on several U.S. items like bourbon whiskey, Harley-Davidson motorcycles (HOG), and boats and impact the number of jobs in the steel sector. Tariffs or increased input costs have resulted in the decline in purchases of U.S. products and cars, and the automotive industry is a significant steel user. Tariffs meant fewer jobs in manufacturing, according to a PBS article. With the removal of tariffs, we should see an increase in employment, steel production, and better competition against foreign rivals who could price compete against U.S. producers while the tariffs were in effect. Ultimately, this will directly benefit U.S. Steel and the steel sector as a whole.

U.S. Steel continues to outpace those in its industry when looking at year-over-year revenue growth. X’s Revenue Growth of $5.62B beat by $273.08M, a whopping 119.44% Y/Y, and operating cash flow of an A+ grade is at 2,863.77%. As U.S. Steel President and CEO David B. Burritt commented during the recent Q4 earnings call, “2021 was a year of records, and we delivered with record earnings and free cash flow and record safety, environmental, quality, and reliability performance… We enter 2022 from a position of strength and are relentlessly focused on continuing our disciplined approach to creating stockholder value.

X Financials (US Steel Investor Presentation)

Our balance sheet has been transformed, record cash significantly de-risks strategy execution, and our capital allocation priorities have enhanced direct stockholder returns.” In addition to excellent growth prospects, U.S. Steel has remained a force to be reckoned with as it continues to see profits stemming from its streamlined production and having divested much of its lower-margin international businesses.

Although inflation has driven up prices substantially, companies like U.S. Steel have been able to pass on material costs to consumers. After being on solid footing with tremendous success over the last year (43%-plus share price), U.S. Steel continues to boast reliable financial performance with an A Profitability Grade and $4.09B in Cash from Operations.

X Profitability (Seeking Alpha Premium)

X’s excellent financial performance is exhibited with its reinstatement of $0.05 per share quarterly dividend, a 400% increase from the prior period. As I wrote in a previous article United States Steel: X Marks The Perfect Stock, “Record results for Q3 have given way for a $300 million buyback program, and over the next three years, U.S. Steel states that CAPEX is fixed at $3.7B.”

Metal stocks are in demand, and Vale S.A. and its subsidiaries produce and sell iron ore and pellets used as raw materials in steelmaking. Vale also has and extracts nickel and its byproducts like copper, gold, silver, cobalt, and many other metals. Vale saw a share price decline toward the end of last year, driven by the collapse in iron ore prices, below $100. We believe now is the time to get hold of this strong stock pick, which is trading below $20/share. YTD, the VALE is up +25% on the back of soaring metals prices, aided by China’s moves to stimulate its economy. This move on Jan. 19 prompted a number of metals to rally to all-time highs, and is also why we believe it has outperformed other steel producers this year. We believe this upward trend will continue.

VALE Valuation (Seeking Alpha Premium)

As evidenced by the A+ Valuation grade, this stock is very undervalued and our SA Grade indicates it's a good pick for value investors. In addition to trading at a current discount of nearly 80% (P/E ratio TTM 3.34x), VALE's financial health, growth, and profitability prospects are attractive.

With a market capitalization of $85.72B, very strong long-term earnings growth, great revenue growth, and brilliant profitability grades, VALE is one of the best stocks to buy given passage of the infrastructure bill, the construction boom worldwide, and as one of the top five iron ore producers in the world according to NS Energy. "Vale has a very strong cash flow generation that will remain strong in the coming quarters due to the high prices of iron ore; they don't need to rush to make any operational changes in the short term," said Valdir Farias, Executive Director at Mining Consultancy Fioito.

VALE Growth (Seeking Alpha Premium)

VALE's year-over-year Revenue growth is 77.22%, resulting from product growth like iron ore and new trends like tapping into the electric vehicle (EV) sector given its exposure to copper, nickel, and iron ore demand. "Vale serves as the main market for mineral miners. Electric vehicle proliferation will take place over the next decade, and Vale does a very good job of catering to that market. The increasing demand for nickel, iron, and copper will show up in Vale's future earnings results. Vale should be able to bring in considerable earnings growth with the momentum of these larger trends," writes fellow Seeking Alpha author Sandis Weil.

Solid growth, including Q3 2021 EPS of $1.26 beats by $0.19 resulted in Revisions Grade of B. Within the last 90 days, there have been four FY1 Up revisions, and from a long-term stance, given the 20.58% free cash flow strength, I continue to see this stock as a play to outperform some of its peers in the sector.

The outlook on profits for VALE is strong, given its A+ rating and stellar underlying metrics. Current Gross profit margins are an A at 61.16%; Cash from Operations at $29.57B. VALE is displaying its confidence in the market and company following an impressive newly formed dividend policy and strong share buyback program.

VALE Profitability Grade (Seeking Alpha Premium)

"With consistency in dividend payout and with our buyback program almost 100% complete, our Board of Directors has just approved a new buyback program. This time for up to 200 million shares, equivalent to 4.1% of outstanding shares. Our buyback program shows our confidence in Vale's potential to create value," said Eduardo De Salles Bartolomeo, CEO - Q3 Earnings Call. VALE has a lot to offer in the commodities space, and despite market volatility and supply chain shortages, this stock has a great deal to show potential investors. Let us explore our last stock pick, Nucor.

A North-Carolina based steel company, Nucor Corporation, like the others mentioned in this article, is set to benefit from the Infrastructure Spending Bill, construction boom, and is one of my top steel picks. Nucor Corporation, like U.S. Steel, has a rich history and has been around for decades, creating a range of steel and other products. Operating three main businesses: Steel mills and products, in addition to raw materials, this company has a $32.24B market capitalization. This stock comes at an attractive discount with a B+ valuation and is trading at $117/share.

NUE Valuation (Seeking Alpha Premium)

NUE shares are up 3.60% as of yesterday’s market close and +2.80% YTD. “The stock is trading at a relatively attractive valuation ahead of clear catalysts that could unlock significant value for shareholders,” writes IncomeBent Investments. As we look to the future and the stock’s upward trajectory, Nucor is showing signs of potential growth.

NUE has solid growth prospects with a B- overall growth grade and solid Q4 earnings that resulted in EPS of $8.04 beats by $0.19 and three FY1 Up revisions in the last 90 days. “Our record financial performance is the result of years of work reinvesting to strategically position and grow our portfolio of capabilities across the steel value chain. We are leveraging our competitive advantage to aggressively and opportunistically pursue value-enhancing long-term growth,” said Leon Topalian, President, and CEO of Nucor, during the Q4 Earnings Call.

NUE Strategic Growth Programs (NUE Investor Presentation)

Because of its solid growth, Nucor continues to use excess cash and growth initiatives to fund future growth. As outlined in the Strategic Growth Program above, some projects have contributed significantly to increased production and expanding their footprint to advance their competitive edge.

Nucor has seen solid profits over the years and has an excellent A+ profitability grade. With $6.23B in cash from operations and a current EBITDA margin of 27.91%, it should come as no surprise that NUE’s price performance over the last year has outperformed the sector median.

NUE Momentum (Seeking Alpha Premium)

With the status as a low-cost producer, in addition to great profit and momentum, Nucor is considered a dividend aristocrat, paying an annual dividend for 48 years, two years shy of becoming known as a dividend king. Nucor has an excellent dividend scorecard, with an A- dividend safety rating and a 1.69% dividend yield. As I’ve written about in How Our Dividend Grades Averted 99% of Dividend Cuts, a Seeking Alpha Dividend Safety grade of A+ through A- would have averted 99% of dividend cuts. Reliable payouts are a top priority for many income investors, especially during heightened times of volatility and when inflation is a constant topic of discussion. Given Nucor’s track record and overall solid fundamentals and factor grades, I believe this stock will continue to be successful over the long term and is a strong buy.

Commodities are in global short supply, and investing in commodities like steel as an inflationary hedge and a way to diversify your portfolio without overpaying is a great way to capitalize on rising costs. I believe the outlook for steel is positive, and opportunities like the removal of tariffs and the Infrastructure Spending Bill will create increased demand.

Our investment research tools help to ensure you're furnished with the best resources to make informed investment decisions. The stocks I'm recommending - X, VALE, and NUE - are Strong Buys based upon our quant ratings, strong valuation frameworks, growing earnings, and solid profitability. They are defensive stocks in a sense that the current inflationary environment and inherent nature of their businesses allows them to pass on rising costs to their customers. In this inflationary environment, consider Top Consumer Staple Stocks or Top 5 Energy Stocks To Buy. You can also use Seeking Alpha's 'Ratings Screener' tool to help you achieve diversification into desired sectors you like, including commodities, using our Quant Rating as an objective, quantitative view of each stock.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.