What Might Trigger A Short Squeeze For Cliffs Natural Resources?

Aug. 8.14 | About: Cliffs Natural (CLF)


Cliffs has a good chance of experiencing a short squeeze as 33% of the float is short.

With analysts being bearish and sentiment turning bullish, the odds of a squeeze are even better.

Ultimately it will take an unexpected event such as Cliffs selling Bloom Lake to trigger the squeeze.

Cliffs Natural Resources (NYSE:CLF) has been an oasis in the desert for short sellers. The stock is down over 80% from the all time highs as the Chinese economy slows and Australian iron ore companies increase their production.

But lately things have been getting better for Cliffs. In Cliff's annual shareholder meeting, shareholders voted for all six of Casablanca Capital's nominees, giving Casablanca majority control over the board. Lourenco Goncalves, Casablanca's pick to be the boss, is now the CEO and Chairman of the company. Goncalves has promised to unlock as much value as possible for Cliffs.

As a response to the management change, Cliffs' stock has rallied around 25% from the lows. Cliffs has also been one of the best performing stocks in the market over the past two months and the chances of a short squeeze for Cliffs also cannot be ruled out.

So what might trigger a short squeeze for Cliffs?

Well, there are three essential ingredients for a short squeeze, and so far, two of the three are present for Cliffs.

One element is that there needs to be a huge short position relative to the daily trading volume. Cliffs covers this requirement in spades, as there are approximately 51 million shares short relative to the average daily trading volume of 5.9 million shares.

Another element of a short squeeze is that most analysts and market participants need to be leaning to the short side. This is necessary because if analysts are all pessimistic, everyone who wanted to sell has probably already sold in the short/intermediate term.

Cliffs also covers this requirement handily, as many analysts intensely dislike Cliffs. Gordon Johnson of Axiom Capital, for example, called Cliffs his top short idea. Morgan Stanley has a price target of $14. Overall, the consensus analyst price target for Cliffs is $15.43, well below Cliffs' current price.

The third necessary element of a short squeeze is the positive surprise factor. There needs to be an unexpected event that will prompt enough market participants to switch from the short side to the long side to trigger a squeeze.

For Cliffs, this unexpected event will most likely be the company selling Bloom Lake. If Cliffs sells the entirety of Bloom Lake or a significant portion of it, many market participants who were short Cliffs for the sake of shorting iron ore will leave, as an ex-Bloom Lake Cliffs would have much less exposure to iron ore.

Bloom Lake is currently the anchor that is dragging Cliffs down. What new CEO Goncalves does with Bloom Lake will decide whether there will be a short squeeze or not.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.