Since mid-May, the strongest stock in my retirement portfolio has been Cleveland-Cliffs (NYSE:CLF). I didn’t go all-in on the steelmaker. But I have seen a 26% gain in CLF stock in just three months. This despite several bear attacks that, at one point in July, had me sitting on a loss in my position.
CLF stock is controversial for two reasons. First, it’s a steel producer and, unlike rival Nucor (NYSE:NUE), it’s using freshly mined iron and coal, not just scrap. Second, it’s sitting on a lot of debt, almost $5.4 billion at the end of June.
The skepticism means you can still get this growth company for less than 15 times earnings. Make no mistake. This is a growth company.
Great Timing
The current version of Cleveland-Cliffs is the creation of Lourenco Goncalves, a native of Brazil, who joined the company in 2014. Goncalves led moves to buy AK Steel in early 2020, then Arcelor-Mittal’s U.S. operations last December. This made Cleveland-Cliffs the largest producer of flat-rolled steel in the country, and the largest iron pellet producer.
His timing was exquisite. The perceived easing of the pandemic early this year was followed by big government infrastructure plans. China, which has kept other steel producers down with low costs, then decided to cut production to reduce air pollution.
The result is that CLF has buyers for all the metal it can produce. Goncalves told his July 22 earnings call that second-quarter revenues rose $1 billion but cost of goods sold rose just $100 million, compared with the first quarter. The company reported net income of $795 million, $1.33 per share, on revenue of $5 billion.
Still, analysts called that a miss, expecting earnings of $1.52 a share. The shares fell 8% after the announcement, but opened on Aug. 19 some 20% higher than they were before the results.
Keeping it Up
Goncalves is focused on maintaining the momentum.
He has made quick agreements with unions. He’s giving every worker who gets vaccinated $1,500. He put $100 million into a project to reduce emissions at his East Chicago plant. He entered a technology testing project with the U.S. Department of Energy, also focused on lowering emissions.
Analysts now think CLF has room to run as the recovery picks up steam. Of the six analysts following it and tracked by TipRanks, five want you to buy it. Their average one-year price target is almost $31. Even some cynics on Redditt’s r/WallStreetBets are warming to CLF stock.
The Skeptics
There remain skeptics.
Over 10% of CLF’s float was still being held short at the end of July. There’s more short interest in CLF stock than in any other steelmaker.
CNBC’s Jim Cramer still prefers Nucor to Cliffs. For the 12 months ending June 30, CLF stock more than doubled NUE stock’s performance, up 290.6% vs. 131.7%.
Chinese production cuts mean iron ore prices are down. A slowing economic recovery in China means less demand and more supply of cheap Chinese steel. Some analysts criticized Goncalves for giving priority to reducing debt when interest rates are at record lows. They were wrong.
The Bottom Line on CLF Stock
While I was late to the CLF stock bandwagon, I still think it’s a great bet on hard infrastructure, which has bipartisan support.
Once Goncalves pushes down the debt created in assembling the company, he will have room for buybacks and dividends. So far, he has resisted issuing new equity to pay off the debt, although with a market cap of $12 billion he easily could.
That might be because Goncalves is personally invested in his company. Despite holding large stock options as CEO, there’s no record of his selling shares over the last seven years. He’s on the shareholder’s side.
That means he’s on my side.
On the date of publication, Dana Blankenhorn held long positions 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 Living With Moore’s Law: Past, Present and Future 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.
