• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing

Cheap Enough for You? Here's My Plan to Trade Cleveland-Cliffs

I think that CLF can meet all of its short to medium-term obligations, and that should be our (my) window as an investor.
By STEPHEN GUILFOYLE
Oct 11, 2021 | 10:45 AM EDT
Stocks quotes in this article: CLF, NUE, XLB

From the August highs through mid to late September, the share price of Cleveland-Cliffs (CLF) fell a whopping 28.8% to $18.51. Over the same period, or close to it, but from high to low, the stock underperformed, its best in class rival Nucor (NUE) at -27.5%, the Dow Jones US Steel Index at -24.7%, and the broader Materials sector select SPDR ETF (XLB) , at -9.5%. Slower global growth? Sure, the Chinese engine is sputtering, at least partially due to shifting priorities in Beijing. Below prior view domestic economic growth? No doubt about it. That said, demand for materials, ferrous and nonferrous metals alike only finds support should Congress get squared away and pass legislation around a larger spending package that hopefully includes a significant infrastructure build/rebuild.

This (Monday) morning, Cleveland-Cliffs has apparently agreed to acquire Ferrous Processing and Trading, a large processor and distributor of ferrous scrap metal, primarily operating in Michigan and Ohio. The business processes about 3 million tons of scrap per year, approximately half of which is prime grade, and has generated roughly $100 million in EBITDA over the 12 months ended August 31st. The deal has an enterprise value close to $775 million. CLF CEO Lourenco Goncalves said, "With all the new flat-rolled EAF capacity coming online in our market over the next four years, prime scrap will only become more and more scarce."

Also Today

Readers may have noticed iron ore prices up 10% in Asian trading. Readers may have noticed recent rebar price moves in China. Suddenly reports of rising demand for steel, at least in certain parts of China, make headlines. October up from September. November supposedly up from October. No, we don't know. Especially with the potential for a bursting of the Chinese real estate bubble overhanging financial markets every other day it seems. Fact is, well no... not fact. The idea is that the entire group may have been oversold.

Cleveland-Cliffs is expected to report the firm's third quarter financial performance late next week. A consensus of the five analysts I see covering this name is for EPS of $2.23, up from a loss of $0.03 per share a year ago, on revenue of $5.69 billion. This would be good enough for year over year revenue growth of 245%. Think it's the pandemic effect? Okay, let's use Q3 2019, now revenue growth is 925%. No joke.

Wait a Second

If CLF is growing and has real potential to maybe accelerate that growth, why do the shares trade at 4 times forward looking earnings? Could it be the, as of the release of the Q2 numbers three months ago, the dwindling net cash position, the enormous debt-load, the negative free cash flow? Perhaps. Current assets are still twice current liabilities. That said, inventories were about 1/3 of current assets and almost 1/4 of total assets. No, I don't think we should figure out the firm's quick ratio.

In fact, not only at that time did long-term debt make up about 40% of total liabilities (ex-equity), pensions and other post retirement benefits make up more than 25%. This firm is saddled with obligations that it will probably be wearing for quite some time.

What Do I Think?

I think that CLF can meet all of its short to medium-term obligations, and that should be our (my) window as an investor. Let's see what's up with the chart.

Readers will note that CLF has retaken the 2Q day EMA on Monday morning, after riding support at the 200 day SMA since that mid-September bottom. The Full Stochastics Oscillator thinks that maybe CLF has already become technically overbought, but both the Relative Strength Indicator and daily MACD have openly scorned the FSO for even having that very thought.

I think the shares go for the 50 day SMA ($22.83) by earnings in a week and a half, and depending on how optimistic Mr. Goncalves is that day, the shares either retry the 21 day EMA or move toward a retest of the August highs, which in my opinion is a profit worth taking if it does.

Trade Idea (minimal lots)

- Purchase 100 shares of CLF at or close to the last sale ($21.72)

- Sell one CLF December 17th $26 call for about $0.95.

- Sell two CLF October 22nd $20 puts at roughly $0.45.

Net basis: $19.87

Best case: Shares called away at $26 in December for a profit of 30.8%.

Worst case: Shares are put to the trader at $20 in two weeks with CLF trading below that level. Trader would then be long 300 shares at a net basis of $20.26.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.

TAGS: Investing | Stocks | Technical Analysis | Trading | Materials | Industrials

More from Investing

LyondellBasell Could Hold Temporarily Before Renewed Declines

Bruce Kamich
Jun 27, 2022 2:22 PM EDT

Let's take a look.

Kass: Why Markets Could Make a Yankees-Like Comeback

Doug Kass
Jun 27, 2022 2:00 PM EDT

I remain uncharacteristically bullish. Here's why.

Here's How to Treat Bristol-Myers Squibb's Charts

Bruce Kamich
Jun 27, 2022 1:10 PM EDT

BMY is breaking out to a new high.

If You Buy Now in This Bear-Bull Battle, You May Be Paying Later

Bob Lang
Jun 27, 2022 1:00 PM EDT

You really want to snag a bargain -- and bank a win -- right now. Here's a better strategy.

Should You Buy Micron Technology Ahead of Earnings?

Bruce Kamich
Jun 27, 2022 12:20 PM EDT

The chipmaker reports its latest quarterly results this week.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 12:04 AM EDT PAUL PRICE

    Two Good Signs -- Especially for Small-Cap Investors

  • 12:10 AM EDT PAUL PRICE

    More Insider Buying in American Woodmark (AMWD)

    American Woodmark , which I've discussed here fr...
  • 08:55 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The 10 personality traits of successful traders an...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login