Cleveland-Cliffs At $9, What’s Next?

Slowly but surely Cleveland-Cliffs’ (NYSE:CLF) shares are back to the $9 level which was last seen at the beginning of this year. The stock has been in the penalty box for the most part of this year, including two trips to $6.50. Interestingly, the recent upside went almost unnoticed, with relatively small trading volume. However, the underlying fundamentals are very strong.

Source: Steelbenchmarker.com

Upside in the steel market continues. As a reminder, Cliffs’ realized pellet prices in the U.S. depend mostly on the prices that its customers are able to get for their products. There’s a lag for contract prices as opposed to spot prices, but generally rising spot steel prices are a good indication of increased realized prices for Cliffs. The sustainability and the strength of the recent upside move indicate that it is related to the general health of the steel market rather than to tariff action. Iron ore prices have also stabilized, providing some additional support to Cliffs’ pricing:

Source: Barchart.com

The combination of the steel market’s strength, iron ore price stability and the company’s increased guidance has finally led to a substantial increase in its earnings estimates:

Source: Yahoo Finance

A 32% increase in next year’s earnings estimates in just one month is something the market cannot ignore despite the fact that “value plays” remain generally unloved by market participants. However, the stock remains ridiculously cheap even after the recent upside. Currently, Cliffs trades at less than 7 forward P/E. In my opinion, this is way too cheap for a company whose earnings estimates are constantly increasing together with the expected realized prices for its production. The sole reason for this dramatic undervaluation is the continuous market distrust for value and rebound plays.

Since my previous article on Cliffs was published (I discussed the company’s first-quarter earnings report), fundamentals have improved for the company. The general market sentiment is now better along with steel prices. However, the stock continues to lag improving fundamentals. Even at a very conservative 9-11 forward P/E, Cliffs belongs to the $12-15 range. However, I’m a realist and I expect that the first stop for the company’s shares will be in the $10-12 range:

I’d argue that fundamentals haven’t been that good for Cliffs for years and that the stock now has improved the chances of getting through the $9 resistance area. At the same time, I’d reiterate what I’ve said many times in my articles on Cliffs: for new positions, the stock is better bought on pullbacks. While the company’s shares remain very cheap fundamentally, shorter-term market price action is unpredictable. We haven’t yet seen sector rotation from high-flying overpriced tech stocks to value plays. Without such a rotation, Cliffs’ share price gains may be vulnerable regardless of the underlying fundamentals.

Nevertheless, I continue to expect to see Cliffs shares in the $10-12 price range in the second half of this year. Fundamentally, a higher price is appropriate and, given the right catalysts, it can be reached fast, as we have recently seen with many beaten-down oil names. Needless to say, I remain long-term bullish on Cliffs.

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Disclosure: I am/we are long CLF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.