If you think President Biden can get an infrastructure deal done, then buy Cleveland-Cliffs (NYSE:CLF) stock.
Big earnings are expected July 22, as the economy continues to reopen.
Analysts expect $1.53/share of earnings on $5.09 billion in revenue. There’s a whisper number of $1.61/share.
The company’s share price is falling fast going into earnings. The stock was more than $23/share on July 12, it trades today closer to $19. Shorts have jumped in, grabbing 19% of the float.
What worries the shorts is the debt level, which stood at $5.4 billion at the end of March. The company had negative operating cash flow in 2020, and that accelerated into 2021.
Cleveland-Cliffs specializes in rolled steel, and it’s executing a roll-up of that sector.
In 2020 it bought two big competitors, AK Steel and ArcelorMittal USA, for a combined $2.5 billion. The result is a fully-integrated producer that mines its own iron ore pellets and owns mills that produce sheet or tube steel.
Brazilian CEO Lourenco Goncalves has been hailed as “Steelmaker of the Year,” and a friend to steel workers, but he’s an unusual savior.
Goncalves was charged with sexual harassment while head of Metals USA in Houston. They paid out a $300,000 settlement in 2005.
Goncalves remained at Metals until 2011, then led a group that took over what was then Cliffs Natural Resources, in 2014.
The group was led by a hedge fund called Casablanca Capital, which closed in 2016 after founder Donald Drapkin died in a skiing accident.
Goncalves has also been known to lose his temper during analyst calls.
A Closer Look at CLF Stock
Goncalves’ personality, his use of debt, and continued skepticism over the U.S. steel industry have combined to create a volatile stock.
Our David Moadel says you need “nerves of steel” to hold it. Many CLF stock investors today are traders seeking quick profits, drawn by comments at Reddit and hedge funds that seem bullish.
The recent fall in the stock must worry some of these buyers. Cleveland-Cliffs has about 500 million shares and daily trading volume of about 28 million.
There are also risks inherent to steel, as with a woman who recently fell to her death at an AK Steel mill in Michigan.
A Plan That Could Work
Still, what Goncalves has put together should work.
When earnings are released, analysts will be looking closely at how much of the debt from the Arcelor and AK deals has been repaid.
Bullish analysts think it should trade in line with Nucor (NYSE:NUE), which has a market cap of $17.5 billion on 2020 sales of $20 billion.
Based on expectations for the quarter, Cleveland-Cliffs is also headed to a $20 billion year, yet its market cap is just under $10 billion.
The deals look well-timed. Cleveland-Cliffs has complete control of its supply chain. Demand for steel is rising, There’s a bipartisan framework for $579 billion in physical infrastructure.
This would include large projects requiring a lot of American-made steel. The plan is still being negotiated, and may not come out as bipartisan, but those parts supplied by Cleveland-Cliffs seem very popular. Steel prices are up in 2021.
The Bottom Line
I don’t buy stocks for a quick profit. I look to get returns over at least 3-5 years.
The latest action in CLF stock puts me underwater on a small position I opened in May. That means you can get in today at the same price I did, with the same fundamental outlook.
A lot will be known by the end of the week, but if the second quarter report comes in as advertised, expect to pay more than the $19.79/share I paid.
On the date of publication, Dana Blankenhorn held a LONG position in CLF. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
