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Despite a Less Favorable Outlook, Cleveland Cliffs Remains a Buy

Although the outlook for steel producers has become more mixed since I wrote my last column on Cleveland Cliffs (NYSE:CLF) stock, the prognosis of Cleveland Cliffs remains quite strong.

CLF stock
Source: Shutterstock

That’s because ongoing, powerful, positive catalysts are still likely to keep steel prices elevated going forward. Meanwhile, one of the main threats against U.S. steel companies has become much less menacing.

Also making CLF stock appealing is its recent, sizable pullback and its extremely attractive valuation.

Steel’s Outlook Has Become More Mixed

Driven by shortages of materials and labor, new single family housing unit starts fell 2.8% year-over-year in August, CNBC reported recently. Overall housing starts, however, rose nearly 4% from last year, as multifamily home starts were meaningfully higher than in the same period a year earlier.

Compared to earlier in the year, however, the housing market’s growth has slowed meaningfully. In June, for example, overall starts jumped 6.3% from last year.

In addition to the shortages, the reopening of economies, the relatively strong recent economic growth and the return to in-person school may all be playing a role in the housing market slowdown. As more cities reopen and the economy becomes stronger, there’s less incentive for Americans to move in search of better paying jobs, fewer lockdown restrictions and open schools.

Since steel has become a prevalent substitute for lumber in housing amid the latter commodity’s booming price increases, the homebuilding slowdown and the subsequent decline in lumber prices are likely to have a negative impact on steel prices.

Indeed, as of Sept. 25, lumber prices, although still historically very high, tumbled 68% from their record high. And steel prices have already dropped slightly.

Another factor causing steel’s prognosis to deteriorate recently is events in China. In the Asian country, the real estate sector is slowing sharply due to measures taken by Beijing. Also hindering the Chinese real estate space is the potential default of a large property developer in the country, Evergrande.

Powerful Catalysts Remain

Generally, the housing market’s fundamentals remain favorable for U.S. steelmakers, including Cleveland Cliffs. That’s because both lumber prices and home prices remain historically very high. As a result, builders remain strongly incentivized (although less so than earlier in the year) to build many new homes that incorporate a great deal of steel.

And with interest rates likely to remain extremely low for an extended period of time and a sizeable number of Americans still looking to move to the suburbs and become homeowners, home prices are likely to remain high for some time. Meanwhile, inflation and strong demand should keep lumber and steel prices elevated. All of those dynamics are quite favorable for Cleveland Cliffs and its peers.

The U.S. Tariff Outlook Is Less Worrisome

When I wrote my previous column on CLF stock, I had worried that the Biden administration could look to remove the tariffs on European steel. But the administration is currently battling rapidly falling poll numbers.

What’s more, the 2022 U.S. congressional elections are just over a year away. And with the House and Senate very closely divided, the votes of the employees of steelmakers in Ohio and Pennsylvania, along with the votes of their families, could very well determine which party controls the Congress starting in 2023.

Therefore, with the congressional Democrats very vulnerable due to President Joe Biden’s falling approval numbers, I predict that the Biden administration will refrain from eliminating the tariffs levied by the Trump administration on European and Canadian steelmakers. Of course, the retention of those tariffs would be quite positive for Cleveland Cliffs and CLF stock.

Valuation and the Bottom Line on CLF Stock

After the shares’ recent declines, CLF stock is changing hands for slightly less than 4x analysts’ average 2021 earnings per shares estimate. They’re also trading for just 0.75x the company’s 2020 sales.

With such low valuations, the market seems to be betting on a collapse of steel prices. But with the remaining, strong positive catalysts for steel in the U.S. and tariffs unlikely to be removed on Canadian and European steel for the foreseeable future, that’s very unlikely to happen.

Consequently, I remain upbeat on CLF stock and recommend that value investors buy the shares.

On the date of publication, Larry Ramer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, Roku, Plug Power and Snap. You can reach him on StockTwits at @larryramer. 

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