Cheap enough for you? Here is my plan to trade Cleveland-Cliffs

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Between the highs in August and mid-September, the Cleveland-Cliffs (CLF) stock price fell 28.8% to $ 18.51. Over the same period, or almost, but from top to bottom, the stock underperformed, its best rival Nucor (NUE) at -27.5%, the Dow Jones US Steel index at -24.7% and the wider materials sector. select SPDR ETF (XLB), at -9.5%. Slower global growth? Of course, the Chinese engine is failing, at least in part because of the shifting priorities in Beijing. Below past domestic economic growth? No doubt about it. That said, demand for materials, both ferrous and non-ferrous, will only find support if Congress resolves itself and passes legislation around a larger spending program which, hopefully, includes a construction / rebuilding. important infrastructure.

This (Monday) morning, Cleveland-Cliffs apparently agreed to acquire Ferrous Processing and Trading, a large scrap metal processor and distributor, operating primarily in Michigan and Ohio. The company processes approximately 3 million tonnes of scrap per year, about half of which is premium grade, and generated approximately $ 100 million in EBITDA in the 12 months ended August 31. The deal has an enterprise value of close to $ 775 million. CLF CEO Lourenco Gonçalves said: “With all of the new flat-rolled FEA capabilities coming to our market over the next four years, premium scrap will only become scarce. “

Also today

Readers may have noticed that iron ore prices rose 10% in Asian trading. Readers may have noticed the recent rebar price movements in China. Suddenly, reports of increased demand for steel, at least in parts of China, are making headlines. October from September. November supposedly higher than October. No, we don’t know. Especially with the potential for the Chinese real estate bubble to burst, looming over financial markets every other day, it seems. The point is, well no… not a fact. The idea is that the whole group may have been oversold.

Cleveland-Cliffs is expected to release the company’s third quarter financial results at the end of next week. A consensus of the five analysts I see covering this name is for EPS of $ 2.23, down from a loss of $ 0.03 per share a year ago, on revenue of $ 5.69 billion. . That would be enough for year-over-year revenue growth of 245%. Do you think this is the pandemic effect? Okay, let’s use the third quarter of 2019, the revenue growth is now 925%. No kidding.

Wait a second

If CLF is growing and has real potential to maybe accelerate that growth, why are stocks trading at 4 times expected earnings? Could it be, since the publication of the second quarter figures three months ago, the decrease in net cash, the enormous indebtedness, the negative free cash flow? May be. Current assets are always twice the current liabilities. That said, inventories represented about 1/3 of current assets and almost 1/4 of total assets. No, I don’t think we should determine the company’s quick ratio.

In fact, not only at that time, long-term debt was about 40% of total liabilities (excluding equity), but pensions and other post-retirement benefits were over 25%. This firm is grappling with obligations that it will likely carry for quite a while.

What do I think?

I think CLF can meet all of its short and medium term obligations, and that should be our (my) window as an investor. Let’s see what’s going on with the graph.

Readers will note that CLF resumed the Q2 EMA on Monday morning, having benefited from 200-day SMA support since the low in mid-September. The Full Stochastic Oscillator thinks CLF may be technically overbought already, but the Relative Strength Indicator and Daily MACD have openly despised the FSO for even having that thought.

I think stocks are going for the 50-day SMA ($ 22.83) per profit in a week and a half, and according to Mr. Gonçalves’ optimism that day, the stocks are retrying the 21-day EMA or are heading for a new August test. tops, which in my opinion is worth taking if so.

Business idea (minimal lots)

– Buy 100 shares of CLF at or near last sale ($ 21.72)

– Sell a CLF call on December 17th for $ 26 for around $ 0.95.

– Sell two CLF puts on October 22 at $ 20 at around $ 0.45.

Net basis: $ 19.87

Best case: The shares were repurchased at $ 26 in December for a profit of 30.8%.

Worst case: The shares are offered to the trader at $ 20 within two weeks, with the CLF trading below that level. The trader would then be 300 stocks long on a net basis of $ 20.26.

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About the Author

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Christine founded Sports Grind Entertainment with the aim of bringing relevant and unchanged sports information to the general public with a specific perspective for each story offered by the team. She is a competent journalist who has a reputable portfolio with skills in content analysis and research.

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