Are the Shorts Right On Cliffs?

With shares of Cliffs Natural Resources (NYSE:CLF) trading at around $17.94, is CLF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Cliffs Natural Resources has headed in mostly one direction over the past two years, which is down. There has been no slowdown in the downward momentum, and the demand situation hasn’t improved.

Cliffs Natural Resources is suffering from weak demand and pricing for iron ore, weak steel demand, and oversupply. Geographically, China and Europe have been weak, and the mining situation in the United States has seen much better days. Furthermore, labor and mining costs have increased, and these costs are expected to continue to increase throughout the year. The dividend was cut in order to reduce overall costs. Revenue and earnings have declined last year as well as last quarter on a year-over-year basis. In other words, it’s ugly out there.

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The big question for Cliffs Natural Resources is whether or not the stock is oversold. Some technicians argue that the stock is at a support level, but even if that’s the case, support is likely to be broken based on fundamentals and overall weak global demand.

The best possible bullish argument doesn’t relate to technical analysis, but the potential in emerging markets. The problem that not many people seem to talk about is that emerging markets are still tied to developed markets. Hence the phrase: global market.

Emerging markets might have the most growth potential, but they will fail if developed markets fail. In simplest terms, they will fail if the largest economy in the world fails, which is the United States. That being the case, a lot comes down to monetary stimulus. Can the Federal Reserve continue to assist markets for a considerable amount of time? Yes. However, if Cliffs Natural Resources is unable to perform well in such an environment, then what would make investors believe that it will perform well when economic support is removed? Of course, the other argument is that this is a real economic recovery that no longer needs monetary stimulus. If that’s the case, then Cliffs Natural Resources is well positioned.

Many analysts are attempting to call a bottom for Cliffs Natural Resources. Attempting to call bottoms on stocks with significant downside momentum is a dangerous game, and it’s certainly not a game that will be recommended here.

Let’s take a look at some important numbers prior to forming an opinion on this stock.

T = Technicals Are Weak

Cliffs Natural Resources has performed poorly in a bull market. This is a big negative.

1 Month Year-To-Date 1 Year 3 Year
CLF -21.98% -52.93% -61.57% -61.51%
VALE -16.99% -29.23% -18.98% -35.02%
BHP -8.77% -16.84% 5.34% 13.33%

At $17.94, Cliffs Natural Resources is trading well below its averages.

50-Day SMA $19.72
200-Day SMA $30.85
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E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Cliffs Natural Resources is close to the industry average of 0.60. Debt has been managed well.

Debt-To-Equity Cash Long-Term Debt
CLF 0.60 287.20M 3.43B
VALE 0.42 6.81B 32.61B
BHP 0.52 5.27B 35.48B

E = Earnings Have Weakened

Earnings had been improving on an annual basis until 2012. The same can be said for revenue.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 3,609 2,342 4,682 6,794 5,873
Diluted EPS ($) 4.75 1.63 7.49 11.48 -6.32

Looking at the last quarter on a year-over-year basis, revenue and earnings significantly declined.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 1,264.70 1,626 1,544.90 1,535.90 1,140.50
Diluted EPS ($) 2.63 1.81 0.59 -11.36 0.66

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

It’s impossible to predict stocks with 100 percent accuracy. With that said, based on the current economic environment, downside risk for Cliffs Natural Resources greatly outweighs upside potential. Vale (NYSE:VALE) and BHP Billiton (NYSE:BHP) are lower-cost producers that are likely to hold up better if the broader market suffers a steep market correction. This situation already occurred in 2008. However, none of these companies are safe plays if the market falters.

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Cliffs Natural Resources is actually a well-run company, but it’s not situated well at the current time. Cliffs Natural Resources is a STAY AWAY.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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