Is Nucor Stock a Buy Following a Vote of Confidence From Warren Buffett's Berkshire Hathaway?

Key Points

• I bought Nucor in 2015 when the Dividend King steelmaker was deeply out of favor.

• The company has again become unloved on Wall Street -- a pretty normal swing for Nucor.

• The vote of confidence from Buffett is great, but it just confirms what I've believed for a decade.

• 10 stocks we like better than Nucor ›

I added Nucor (NYSE: NUE) to my portfolio in September 2015. Roughly a decade later, Warren Buffett's Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) decided to buy the stock, too. I'd love to suggest that Buffett was just following my lead, but that's an obvious joke. However, I am fairly certain Buffett and his team bought the stock for the same basic reason that I did.

Here's why you might want to buy this giant U.S. steelmaker, too.

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What does Nucor do?

Nucor makes steel, as noted in the introduction. But that isn't the whole picture, because there are two general ways to produce steel. The old way is to use blast furnaces, which use iron ore and metallurgical coal, to produce primary steel. That's a very costly process that requires high utilization rates to be profitable. When times are tough in the cyclical steel business, blast furnaces usually bleed red ink. This is not the technology that Nucor uses.

Image source: The Motley Fool.

Nucor uses electric arc mini-mills. These steel mills use electricity and scrap steel to recycle steel so it can be used again. The costs are lower and the mills are very flexible, so they can be ramped up and down along with demand more easily than a blast furnace. Because of this, Nucor tends to have stronger profitability through the typical steel industry cycles that occur. To be fair, Nucor isn't the only company that uses these mini-mills; smaller peer Steel Dynamics does, too.

The additional fact that separates Nucor from the competition is its size. It is the largest and most diversified steel company in North America. But it does more than just make commodity steel. It has long focused on expanding its business to include higher-margin specialty steel products, like building parts. Some recent acquisitions include fabricating businesses that serve the clean energy sector and data center operators. Not only do such businesses enhance margins, but they also help position Nucor for long-term growth.

NUE data by YCharts

Steel is cyclical, and that leads to buying opportunities

Steel is highly important to the economy. That's good and bad. The good thing is that the industry produces a necessity product. The bad thing is that demand for steel tends to wax and wane along with economic activity. While Nucor's business is highly resilient, it still tends to swing widely as the steel cycle unfolds. Buying like a contrarian when Nucor is out of favor on Wall Street is usually the better, though often more difficult, choice.

As the chart above highlights, Warren Buffett and his team are buying Nucor while it is out of favor. The thing is, Buffett's investment approach is fairly simple to understand from a top-level view. Buffett likes to buy good companies when they are attractively priced and then hold for the long term to benefit from a company's growth over time.

As noted, Nucor's business is differentiated by size and quality. But there's more here, too, because Nucor has also proven that it keeps investors a top priority. That's highlighted by the company's position as a Dividend King, with over five decades' worth of annual dividend increases despite its highly cyclical business. You simply can't build a record like that by accident; it requires a strong business plan that gets executed well in both good times and bad.

In fact, the company's "mantra" is to produce higher highs and higher lows. That basically means that management is always looking for ways to reinvest in the business for growth. Downturns are often seen as investment opportunities, with the company currently in the middle of a $3 billion capital investment plan in 2025 alone. As the projects in that plan start to come on line, Nucor will grow as a business, making it an even more valuable company. Which is exactly what Buffett likes to see.

Should you follow Buffett's (and my) lead?

Nucor is not for the faint of heart, given the cyclical nature of the business. Dramatic stock price swings are fairly normal here and could put conservative investors off. But if you don't mind a little near-term volatility, I can attest that Nucor has, over the last decade, become a larger and more valuable company. In fact, it is one of my best-performing investments even after the recent stock pullback.

That pullback, however, was seen as a buying opportunity by Buffett and his team. And it could be the same opportunity for you, if you don't mind taking a bit of a contrarian stance. That Buffett just bought shares could be the push you need to jump aboard what is likely North America's best-run steel company. Hold on for the long term, like Buffett likes to do, and you could benefit from the company's growth focus just like I have.

Should you invest $1,000 in Nucor right now?

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Reuben Gregg Brewer has positions in Nucor. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.