Cleveland Cliffs Should Have Rallied, Not Plunged 17%

JP Morgan notes that the extreme sell-off in steel stocks Wednesday can be largely attributed to a Bloomberg story Tuesday – “ArcelorMittal (MT) Says Half of Customers Rejected $250 Surcharge” - quoting Lou Schorsch, head of MT’s Flat Carbon Americas. The market interpreted this information as the steel producers are unable to pass through higher raw material prices with higher steel prices.

It should also be noted that the $250/t raw material surcharge, or as MT likes to call it “cost recovery program,” was implemented for their fixed price contracts which represent less than 50% of shipments and not for MT’s spot market shipments. The firm views the program as a success by achieving a 50% success rate given this unprecedented move in altering fixed price contracts.

With steel stocks in their coverage universe off an average of 15% in the last two days, they view this as an opportunity to gain an attractive entry point into a group with strong fundamentals that should see record high earnings in both 2Q and 3Q. While they believe most steel stocks warrant a strong rebound, the firm's top picks in the group are Cleveland Cliffs (CLF), Nucor (NUE) and US Steel (X). CLF dropped $19.93 or 17% yesterday and now trades at only a 2009 PE of 7.5x and an EBITDA multiple of 5.4x. Thermal coal represents only 2% of CLF sales, and they see numerous positive earnings catalysts both this year and next for the company.

For those who read beyond the title of the Bloomberg article, they should have noticed that Mr. Schorsch stated that their iron ore prices from CLF will be up 60% in 2008 (compared to JPM's 26% forecast). If this was true, CLF should have rallied, not dropped 17%. NUE is trading at a 2009 PE of 7.9x and EBITDA multiple of 4.3x, near the lows of its historical trading range and recently raised its earnings guidance.

Notablecalls: Note the call was initially issued yesterday afternoon as CLF was trading around $104. I continue to view CLF as the prime bounce candidate in the coal-steel space.

Comments

[dougnhi:]

CLF has been on an unsustainable speculative bubble ride for a long time. A major correction is well past due. In a global recession, where construction loans are failing at high rates, and cars/planes and everything else steel is no longer needed, how long before the bulls realize that the price is vaporware? Watch out below!

2008 Jul 03 08:49 AM

[blink0404:]

as the market continues to go down, coal, which used to be a safe haven, now looks like it may be subject to a downward trend. Here's a pretty good podcast that discusses what to during this down market and what's going on with coal, steel, bulk shipping, and agriculture.

the main idea is that individual investors dont have to act like institutional investors and this market and may be better holding cash than trying to beat the market.
www.greenfaucet.com/sh...

2008 Jul 03 12:21 PM

[fatcat:]

People who are chasing these commodity based industries as safe havens had better be savvy investors.These stocks can get away from you to the downside at lightning speed!!

2008 Jul 03 01:14 PM

[mkreisel:]

What goes up on stairs goes down in elevators.

What goes up on elevators jumps out of the window.

2008 Jul 03 02:33 PM

[CLH:]

Yes commodities have topped and will head down. Remember commodities are NOT long term investments. These commodity spikes have happened again and again.

2008 Jul 04 11:23 AM

[NOWHEREMAN:]

Obviously all of you have missed the "Commodity Bubble". Bubbles, BTW, are created from complacency not by climbing a "Wall of Worry".

Why the Sharp sell off in Commodity Stocks?
IMHO, The Financial Institutions are bracing for the "Mark to Market" aspect of their holdings by selling the so called High Flyers to raise MONEY.

I say So Called because their PEs are low. More will be dumped and they will all go down further but this will be another buying opportunity on a short term basis within a Commodities Bull Market which often last from 10 to 20 years.

Commodity Spikes do not encompass ALL Commodities simultaneously. This is a Secular Bull market in commodities driven by supply/demand factors but nothing goes up in a straight line forever. Corrections are part and parcel of the equation.

2008 Jul 05 12:07 AM

[Stockaccumu...:]

Another case of strange drop in price: (SOL) Renesola...

Nice article, but one stock the analysts will have it right in the very near future: (SOL) Renesola is an amazing buy for first thing Monday morning ... all the analysts actually love SOL...

Even Zacks published this (see below article) 7 trading days ago about Renesola (SOL), when the price was bouncing around at about $20.

Zacks Rank in Industry 1 of 44... the best of all solars. Thats number one...

See Zacks' site.

This in addition to Investors Business Daily June computer ranking of SOL as the 4th best company (not just solars but the whole world, every company) to invest in... and in addition to Piper Jaffray's amazing careful on site research on SOL.

Piper Jaffray's article in June practically audited SOL, and its clean balance sheet, and they love it. They don't put their name on just any company.

Last week's drop was clearly a case of throwing the baby (amazing SOL) out with the bathwater to raise cash to feel good before the July 4th weekend... No news on SOL, just bullish: New rediculous cost of oil, and local and national governments worldwide jumping on the Solar bandwagon...

Note that SOL actually sells to other solars, and has a unique method of production and supply, recycling for creation of its product... a unique process and company.

I trust all three combined, Zacks, IBD, and Piper Jaffray.

Read this quote from Zacks last week:

"Through its history, ReneSola regularly adapted to changing market dynamics. The company is aggressively ramping up its polysilicon and solar wafer production capacities. Going forward, increased captive generation of polysilicon will improve its cost structure and enable wafer capacity expansions. Globally, rising solar wafer sales, along with escalating crude and long-term supply agreements, should collectively generate significant earnings growth. Buoyed by these positive factors and
impressive results, SOL increased its 2008 production
output and sales guidance. Accordingly, with a
bullish outlook and an attractive relative valuation, we initiate coverage of SOL with a BUY recommendation and a six-month target price of $24.25, representing 27.2% upside potential."

Note: today, at $13 SOL upside would be perhaps 40% ... Zacks published this above article 7 trading days ago when SOL price was much higher... other analysts have targets of $40, some at $55...

Time to run to your laptop and buy SOL fast...

2008 Jul 05 03:17 PM