In my experience, the investments we regret most are the ones we never made. For example, I wish I’d purchased shares of Starbucks Corp. (Nasdaq: SBUX) when the time was right, but I didn’t. As a result, I’ve missed out on returns of 16% a year for the past 15 years. And with the stock’s recent earnings multiples, like its current price-to-earnings (P/E) ratio of 27, the stock seems way too expensive to jump into now.

#-ad_banner-#I chose not to invest in Starbucks because I thought, and still do think, their coffee is terrible. But what I failed to acknowledge was many other people were raving about Starbucks, and the growing popularity of their specialty coffees might propel the stock to great heights. I didn’t have to like the coffee, I just had to buy the stock, right?

Currently, I’m concerned many investors may be setting themselves up for similar regret by avoiding a stock in another industry — steel. The steel industry was hit hard during the recession, for sure, but it’s starting to improve along with the overall economy. For example, analysts project total sales for the industry of $142 billion this year, a 57% gain from a recession-low of $90.1 billion in 2009. This year’s projected net profit of $6 billion is more than a 450% jump from the $1.7 billion loss posted in 2009.

Nevertheless, investors have been quickly exiting steel stocks, which as a group have fallen nearly 30% year-to-date. In their rush to get out, investors have been dumping shares of one of the best companies in the industry: small-cap steel producer Steel Dynamics Inc. (Nasdaq: STLD). I think they’ll regret it. This stock is one to hold no matter how you feel about the steel industry in general.

 

One of the main things setting Steel Dynamics apart is that it keeps costs low by mainly producing steel from scrap, as opposed to less refined materials, so it typically doesn’t have to start from scratch. Besides being cheaper, this has enhanced profits in a tough economy by helping the company meet demand more quickly than many rivals. This advantage was most recently apparent in the third quarter of this year, when the gross margin rose a point to 9.8% and operating income jumped 57% to $139 million. It has also helped maintain positive earnings growth in the long-term, as shown by an annual growth rate of 3% for the past five years.

Steel Dynamics achieved these results in the face of some major headwinds, such as weak construction activity outside of the petrochemical and energy sectors. (Construction is typically a third of the company’s business). Auto industry customers such as Ford Motor (NYSE: F) and General Motors (NYSE: GM), have also been demanding less steel recently. Furthermore, pricing for products in the company’s core flat-rolled steel business has been terrible. In the third quarter, for instance, those prices fell very steeply — by $95 per ton. However, management believes prices won’t get any worse for flat-rolled steel, which is found in autos, appliances and many other products.

To aid future growth, the company has entered into a joint venture with Japanese steelmaker Kobe Steel (OTC: KBSTY). Together, the two companies have set up Mesabi Nugget, a plant in northern Minnesota that produces iron nuggets for use in steelmaking. The plant is already running near full capacity. Besides making Steel Dynamics self-sufficient by meeting all of its iron ore needs, the plant should further cut costs by providing a cheaper alternative to the pig iron sometimes used to make steel.

Steel Dynamics owns two scrap metal recyclers, OmniSource and Recycle South, which will continue to be key revenue generators. The two recyclers produce far more scrap than necessary for steel production, so about 75% is sold to other users. Scrap metal should go for progressively higher prices because of strong international demand, particularly in fast-growing countries. The sale of steel rails to railroads like Norfolk Southern Corp. (NYSE: NSC) and Union Pacific Corp. (NYSE: UNP), for example, should be a profitable long-term growth opportunity, analysts say.

Analysts project annual growth in sales of 6%, cash flow growth of 13% and earnings growth of 21.5%, all within the next three to five years. Growth in dividends (the stock currently yields 3.2%) is also expected to be strong during that time, averaging 10% annually.

Risks to consider: Although I think Steel Dynamics is an excellent stock to own under current conditions, it needs a much stronger global economy to achieve the results I’ve discussed here. The likelihood of a better global economy seems a lot greater now that Europe truly appears to be dealing sufficiently with Greece’s problems. But if some other big crisis arises, it could be a major drag on Steel Dynamics’ performance.

Action to Take –> Consider buying shares of Steel Dynamics.

Because it’s a well-run, low-cost steel producer, it can be (and has been) profitable in lean times, and could greatly outperform the competition during better times. And based on the good news about Europe, better times just may be on the way. Analysts peg this stock for at least a double by 2016 — some even project a triple. This range seems about right to me, but either way, it looks like a winner.