Cliffs Natural Resources: Beaten Down But Not Defeated

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Cliffs Natural Resources: Beaten Down But Not Defeated

There are a number of stocks that are in the running to be the poster-child for the recent brutal sell-off in the stock market. In the landscape of bankruptcies and forced mergers is an entire market full of stocks trading from one extreme to another.

Chesapeake Energy (CHK) comes to mind as it has gone from a 52-week high of $74 all the way down to $12 at one point as its chief executive was forced to sell his shares to meet a margin call. Fertilizer producer Potash Corp. of Saskatchewan (POT) is another one.  Its shares have gone from $241 to today’s $75 as fund managers bailed en masse. (See also: “Alternative Energy Winners” and “Potash: Is There Potential for Growth?“)

Mining stocks like Joy Global (JOYG) or Bucyrus (BUCY) have seen 70% declines in a few short months.  I could go on and on.  The decimation includes casino stocks, specialty retailers or refiners. (For more on JOYG, click here.)

It is not hard to find interesting beaten down companies.  One to note today is Cliffs Natural Resources (CLF), formerly Cleveland-Cliffs Inc.

Cliffs is an international mining company, the largest producer of iron ore pellets in North America and a major supplier of metallurgical coal to the global steelmaking industry.

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The company has six iron ore mines in Michigan, Minnesota and Eastern Canada and three coking coal mines in West Virginia and Alabama. CLF is also on the verge of acquiring Australian iron ore supplier Portman Ltd expanding their international presence.

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The case for CLF became apparent earlier this year when investing in companies that supplied products for the BRIC countries became all the rage, and property values here at home rose to astronomical levels making developers rush to cash in on new developments.

The BRIC countries (Brazil, Russia, India and China) were moving out of the Stone Age, at least India and China anyway, and their demand for steel was deemed to be insatiable.

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Big hedge funds noticed and sent the shares sharply higher. It was like the oil market only except the commodity was iron ore. Steelmakers also took an interest, looking to vertically integrate in order to lock up supply. Times were good, but what goes up must go down.

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The global economic downturn has given investors fear that steel demand will suffer. As one of the largest suppliers to the steel industry, CLF has been beaten down hard.

I understand that some selling is in order, but a quality company’s stock shouldn’t lose 50 points in a matter of weeks unless something else is driving it. Hedge fund redemptions have played a large part in the stocks’ sell-off this month, and mutual fund redemptions by scared mom and pop investors likely played a role too.

CLF’s management this week adopted a shareholder rights plan, or poison pill, that it claims will protect it from potentially coercive takeover practices. Under the plan, shareholders will be allowed to buy the company’s stock at a discounted price if a person or group acquires ownership of 10 percent or more of its shares.

They say the poison pill is not meant to block offers that are fair and in the best interest of shareholders.  In any event, we find CLF’s shares too compelling to pass up as they trade for less than two times forward earnings and 88 percent of sales.

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An investor with a longer term time horizon won’t likely be disappointed here.

This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.


Article printed from InvestorPlace Media, http://investorplace.com/2008/10/cliffs-natural-resources-clf-beaten-down-not-defeated/.

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