Cliffs Natural Resources Inc (NYSE:CLF) is one of the best performers on Wall Street this year, with CLF stock up over 360% year-to-date.
But the steel mining company, for all its outperformance, isn’t exactly the prime example of a must-own investment. CLF stock is still unprofitable, and the consensus estimate is for a barely break-even year in fiscal 2017, too.
Also, while Cliffs Natural Resources is not quite the same target of bankruptcy chatter as it was a few months ago, it still boasts roughly $2.5 billion in debt over just a $1.5 billion market capitalization and total assets of only about $1.8 billion.
In other words, while the end is not imminent for Cliffs anymore, there are undoubtedly some serious problems that persist for CLF stock.
That means investors need to start wondering about when the rebound rally will fade, and when they should consider cashing out of Cliffs for good.
CLF Stock Faces Long-Term Headwinds
This commentary is not to discount the progress made at Cliffs across a very challenging environment. Management should certainly be commended for making some hard decisions, and ultimately saving what would otherwise have certainly been a doomed business if it continued on the same path.
Bears who have painted CLF stock with a broad brush may still think this is a troubled stock with a footprint in the much-maligned coal industry. But Cliffs is actually a pretty pure-play steel stock now after the sale of its remaining coal-related businesses at the end of 2015.
However, while there has indeed been progress made for Cliffs Natural Resources, most notably a surprise profit in its first-quarter earnings report, it is not out of the woods yet. That’s because many secular headwinds persist for this materials stock, including:
- A strong dollar that will hold back commodity prices
- Weak industrial demand, particularly from a slowing Chinese economy
- A business that has stabilized thanks to one-time efficiencies like mine closures and the sale of unattractive assets
Investors were OK with the lack of growth potential a few months ago because of the incredible valuation and the hopes of a snap-back — and those who bought CLF at its 52-week low of $1.20 have been rewarded with roughly 520% gains.
However, the story is much different after this huge rally, and the valuation isn’t as attractive as it once was.
Consider that while previous shorts had been largely squeezed out from the rally off the lows, the bears haven’t given up and CLF stock faces short interest that is nearly half the float of the stock right now.
And why not, considering that the company has a current price-to-earnings ratio that is infinite (thanks to a lack of the earnings part of that equation) and forward P/E in the triple digits given forward estimates that are slightly better than breakeven.
I don’t knock the bold investors who made a mint on CLF stock lately. But if you think pricing will improve, industrial demand will pick up and that Cliffs can see another strong earnings report that justify this massive run-up, then take care.
Because in many respects, this troubled stock is priced for perfection … and is anything but.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the stocks mentioned here.
