Will Cliffs Natural Resources Change Direction with This News?

With shares of Cliffs Natural Resources (NYSE:CLF) trading around $16, 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:

T = Trends for a Stock’s Movement

Cliffs Natural Resources is a mining and natural resources company that engages in the production of iron ore pellets, fines and lump ore, and metallurgical coal. It operates several iron ore mines, five metallurgical coal mines, and a couple of thermal coal mines in various countries around the world. Basic materials have not seen significant strength this year, although economies in several countries are growing at explosive rates. Infrastructure development and construction worldwide should fuel a surge in basic materials.

Cliffs Natural Resources CEO Joseph Carrabba announced he will step down by the end of the year. Joseph Carrabba has also left his position as chairman of the company, but he will continue to serve as director and CEO of the energy company until a successor for him is found. With a new CEO, and with economies in many countries growing, look for this news to generate positive vibes for Cliffs Natural Resources.

T = Technicals on the Stock Chart are Weak

Cliffs Natural Resources’ stock has been on a disastrous decline over the last couple of years. The stock is now trading at price lows not seen since the 2008 financial crisis. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? They are the 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages.

As seen in the daily price chart below, Cliffs Natural Resources is trading below its key averages, which signal neutral to bearish price action in the near-term.

CLF

(Source: Thinkorswim)

Taking a look at implied volatility (red) and implied volatility skew levels of Cliffs Natural Resources options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Cliffs Natural Resources Options

69.64%

80%

79%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is average demand from call buyers or sellers, and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts, and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and what that means for Cliffs Natural Resources’ stock.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, reactions to the last four quarterly earnings announcements can help gauge investor sentiment on Cliffs Natural Resources’ stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Cliffs Natural Resources look like, and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-74.90%

-976.54%

-85.78%

-38.01%

Revenue Growth (Y-O-Y)

-5.93%

-4.23%

-26.05%

-9.96%

Earnings Reaction

14.98%

-19.99%

-10.51%

-6.26%

Cliffs Natural Resources has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, it seems the markets haven’t been too excited about Cliffs Natural Resources’ recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Cliffs Natural Resources stock done relative to its peers: Alpha Natural Resources (NYSE:ANR), Consol Energy (NYSE:CNX), Peabody Energy (NYSE:BTU), and the overall sector?

Cliffs Natural Resources

Alpha Natural Resources

Consol Energy

Peabody Energy

Sector

Year-to-Date Return

-56.83%

-43.64%

-14.33%

-41.71%

-28.17%

In a very weak sector, Cliffs Natural Resources has been a relative underperformer, year-to-date.

Conclusion

Cliffs Natural Resources is a mining and natural resources company that provides raw products worldwide. The current CEO, Joseph Carrabba, will be leaving his post by the end of the year, so the company is looking for a replacement that could potentially change the direction of the company. The stock has been on the decline for the last couple of years, and is now trading at prices not seen since the financial crisis hit in 2008. Over the last four quarters, investors in the company have not been very excited about declining earnings and revenue figures. Relative to its very weak peers and sector, Cliffs Natural Resources has been a poor year-to-date performer. WAIT AND SEE what direction Cliffs Natural Resources takes.

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