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Things Are Looking Up For Cliffs Natural Resources (CLF); Walter Energy Is A Buy On Dips

Jul. 27, 2013 4:00 PM ETCLF, WLT
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I am still long some shares of Cliffs Natural Resources (CLF) purchased above 20, but took profits in the high 18s prior to the Thursday, July 25, 2013 earnings report, on the shares I purchased on the recent dip to the 52 week low of 15.41.

CLF Is Making Money, But Priced Like It Is Going Out Of Business

Cliffs beat the estimates of 61 cents, earnings 82 cents a share. They also retired debt of over $100 million. They sold more iron ore than expected, thanks to the lower prices, which helped revenues and cash flow. They also made money on the coal side when they were expected to take a loss on that part of their business.

Too Many Short Sellers Not To Rally

The number of short sellers has increased recently from 48 million to nearly 55 million, which is nearly 39% of the float. Book value remains $32.49 and the stock should earn $2.50 to $3.00 per share in 2014 if prices in iron ore and met coal remain depressed, but several times that if things improve. Even the most bearish forecasts look for some minor improvement in the economies next year in Europe and China, so $3.50 to $5.00 per share earnings could be reached next year. Using a more reasonable 10 PE ratio, I look for a move in this stock to $35 to $38 minimally next year. I will not sell out for anything lower. A rally to $50 is not out of the realm of possibilities. On Friday we hit the price of $20 but could not hold it, and fell back to close $19.71. I am looking for a retest of $23 to $24 in the near term before any meaningful sell off. I will continue to buy all dips below $20, once we trade above $20. Once we get to the price of $24, there is no reason to ever return to a price below $20. The bearish sentiment in this stock and the metallurgical coal sector is not justified.

Walter Energy Is Trading Off Its Lows

I wrote an article about Walter Energy a month ago that you can find here, when WLT was trading around $10. I stated that you can buy all new lows in this stock. I was right. Walter Energy is saddled with debt and because it is still losing money, it had to drastically cut its dividend this week. The stock price got knocked down from a recent high of $14.75, back to $11. I believe that WLT remains a high risk stock as it cannot make money in the current low price environment, but if prices recover, this stock could move explosively higher. The stock could also be bought up if it dips back to $10 or lower. I still like this stock, but I like the safety of CLF better, as CLF is making money, reducing costs, and does not appear to be vulnerable to going out of business. Walter Energy should remain bouncy in prices of $11 and lower and is still worth picking up lightly on dips. It may ultimately fail, but bankruptcy is not imminent.

Disclosure: I am long CLF.

Additional disclosure: I may buy WLT lightly on any further dips to $11 and lower.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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