It’s not a name that’s well-loved by Wall Street. Indeed, more than once has Cleveland-Cliffs (NYSE:CLF) CEO Lourenco Goncalves publicly sparred with analysts, and even against a backdrop of measurable growth the pros remain mostly unwilling to tout CLF stock.
Their most recent concern? The longevity of the company’s recent red-hot growth.
While recently-imposed tariffs on steel imports have proven a boon for U.S. companies like Cleveland-Cliffs and United States Steel (NYSE:X), a trade deal could wipe those tariffs away in an instant.
Cleveland-Cliffs stock also recently jumped on news that a multiple-fatality accident near a mine operated by rival Vale (NYSE:VALE) would crimp its iron ore output for the foreseeable future. It won’t be crimped forever though.
This may be a case, however, where investors take a step back and look at the bigger picture, and come to their own conclusions about a company without analysts’ guidance.
War of Words
Never let it be said Cleveland-Cliffs doesn’t bring lots of drama to the table.
The current chapter actually started back in early 2014. On the brink of bankruptcy following a few too many ill-advised acquisitions, the often-colorful mining industry veteran Lourenco Goncalves was named CEO. His first job? Save the company.
He’s done that, even if the effort was at times ugly. Cleveland-Cliffs is poised to report a 2018 profit of $2.10 per share of CLF stock once its fourth quarter results are posted. That will be the best year since 2013, partially thanks to a pare-down of unfruitful operations and partially thanks to a cleaner balance sheet.
Still, analysts have their doubts and haven’t been afraid to voice them. Goncalves, however, hasn’t been afraid to voice his doubts about analysts either.
During the Q3-2018 earnings call, Goncalves called out Goldman Sachs analyst Matthew Korn (who didn’t ask a question during the call), strongly suggesting Korn rethink his views and opinions of Cleveland-Cliffs. He ultimately warned Korn “you can run, but you can’t hide.”
Similarly, in 2014, right as the turnaround was getting underway, Goncalves told Wells Fargo analyst Sam Dubinsky he wasn’t going to answer the analyst’s question because he “already knew” everything about the company.
And yet, Goncalves may have a valid point about Wall Street’s handicappers habitually underestimating Cleveland-Cliffs, and undervaluing CLF stock.
CLF Is a Vexing Stock
For the better part of 2017, CLF shares traded above the consensus price target of around $7.00, as the pros were slow (if not downright unwilling) to adjust their targets even though the stock was ultimately en route to a price above $12 by September of last year.
Time and the environment eventually caught up with a vindicated Goncalves, of course. The stock fell back below $8 per share by December. That was right around the time the analyst community started to dial back their targets after finally upping them to above $13 late last year.
Their timing couldn’t have been worse. Since January, CLF stock has snapped back to $10.70, matching the latest consensus target but en route to what appears to be even higher highs.
This stock continues to vex the very people paid the most to keep a handle on it.
Grossly overshadowed by the drama is just how will the company has done in the current environment.
Cleveland-Cliffs is on the verge of logging its most profitable four-quarter stretch in years, and while analysts are currently modeling declining revenue and earnings for the year now underway, they’ve grossly underestimated earnings in three of the past four reported quarters.
Their worries are understandable. The tariff war will eventually end, for better or worse, and Vale still has a stunning amount of production capacity at its disposal. It won’t be down for long. Analysts, however, are still giving the company little to no credit even after being burned. The turnaround effort largely supersedes the tailwinds likely brewing for Cleveland-Cliffs.
Pessimism and Cleveland-Cliffs Stock
It’s difficult to pinpoint the blame. Investors don’t like uncertainty, and Cleveland-Cliffs has a plateful of it dead ahead. Nobody needs any help from professional stock-pickers to appreciate that.
Nevertheless, one can’t help but wonder if the analyst community errantly is steering investors away from an otherwise compelling prospect, even if as a subconscious pushback to Goncalves’ unconventional treatment of them.
CLF stock is trading at 3.8 times its trailing earnings and only 6.5 times 2019’s profit outlook that arguably understates how will the mining name will do this year… a bargain by any standard.
Bolstering the argument that the pros are unfairly doubting Cleveland-Cliffs is the most recent steel price outlook from The World Steel Association. In October, the association made up of industry insiders predicted steel prices would improve by 1.4% this year after rising 3.9% in 2018.
It’s admittedly an outlook one has to take with a big grain of salt. In fact, The World Steel Association explicitly said in its October outlook that “global steel demand faces uncertainty from tensions in the global economic environment,” It’s an understatement to be sure.
Nevertheless, even with so many unknowns on the radar, the group sees at least a modicum of strength on the horizon.
Looking Ahead for CLF Stock
The challenge for new investors is largely the same challenge analysts face. CLF stock is a fast-moving target with a lot of moving parts in play.
But investors slowly but surely are beginning to recognize how well Goncalves’ turnaround has taken hold and pricing the stock accordingly.
CLF stock has made a string of higher lows and higher highs since 2016 and is pointed toward new 52-week highs right now. Shares are also shrugging off the fourth quarter’s weakness nicely, as fewer investors seem to believe the tariff boost is a future liability if and when it evaporates.
In the meantime, the global economy, for all of its problems, is still going strong, with or without demand from China. The U.S. and even emerging markets are well-positioned headed into the heart of 2019. That will drive demand for steel as well.
Yet, the pros continue to rate CLF stock between a “Buy” and a “Hold,” which is something of an insult given analysts’ bullish bias. Perhaps the pros are simply trying to prove something. Perhaps they have a chip on their shoulder.
Whatever the case, more price volatility is almost guaranteed for Cleveland-Cliffs shares. For true long term investors who know analysts are just best-guessing too, however, this is an interesting prospect.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.