Materials stocks have been some of the best performing issues this week as the broad market bounds out of oversold territory. The Materials SPDR (NYSE: XLB) is up more than +8% from its August 25 low; compare this to the 4.8% rise in the S&P 500 over the same period. This continues a run of relative outperformance for materials stocks that dates back to early July.
Some of this strength is a reflection of currency movements: The dollar typically weakens as risk appetites rise. And that helps push up commodity prices, which in turn lifts materials stocks.
But some of this also reflects renewed confidence in the global economic recovery. On Wednesday, the ISM manufacturing report came in well ahead of expectations as factories continue to ramp up production. And on Thursday we got word that the Eurozone economy grew at its fastest pace since mid-2006 in the second quarter thanks to improved consumer and investment spending.
One of the star performers in the sector is Cliffs Natural Resources (NYSE: CLF), a sprightly provider of iron ore and coal to the steel industry. It’s the largest producer of iron ore in North America and also has operations in Australia and Brazil.
Since August 25, shares are up more than 18% — a demonstration of the stock’s “high-beta” nature.
From a technical perspective, CLF looks good for an assault on its April highs. Volume has been flowing in over the last three months, a sign of accumulation by investors. Shares are trending well, with prices trading over both the 50- and 200-day moving averages. And over the past two days, shares have bounced over their upper Bollinger band but have yet to reach overbought territory. This is a characteristic that is typically seen at uptrend initiations.
But it’s not just the technical picture that’s supportive of further gains for Cliffs. The fundamental picture looks good too as the market for iron ore tightens — pushing prices higher. The commodities team at Citigroup recently increased their iron ore forecasts from $124 a ton next year to $151 due to project delays in Australia and Brazil.
Despite this outlook, shares are trading at only 6.5-times Citigroup analyst Brian Yu’s 2011 earnings per share estimate for CLF. In the past, CLF’s price-to-earnings multiple has risen as high as 15-times during periods of rising iron ore pries and positive earnings revisions. With a conservative 9-times multiple, which was the median seen on the stock between 1993 and 2003, you get a target for CLF of $91. That would be worth a whopping 38% gain from here.
As of this writing, Anthony Mirhaydari does not own a position in any of the stocks named here. Be sure to check out Anthony’s new investment advisory service, the Edge
, which is launching in September. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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