CLF ready to jump

Cliffs Natural Resources Inc., a mining and natural resources company, produces iron ore pellets; lump and fines iron ore, and metallurgical coal. CLF is the largest supplier of iron ore pellets to the North American steel industry but only 42% of revenues came from the United States in 2010. CLF currently trades at a Trailing 12-month P/E of 8.6, and has a market cap of around 11.5B, which makes it a potential buyout target for a company looking to get access to the North American steel industry. CLF has a beta of 2.39, which means that it has historically moved 2.39% for every 1% move in its underlying index. This beta is higher than the S&P 500 due to the cyclical nature of CLF’s business.

 

CLF is expected to earn 13.19 (EPS) in FY 2011, and 14.02 in FY 2012. At its current price, CLF trades at a forward P/E of just below 7. The 5-year growth rate is expected to be 27%, which gives CLF a PEG of 0.24. CLF is 86% owned by institutions as of 12/31/2010. Shown below are the largest institutional holders:

 

I believe CLF is a buy anywhere under $90 based on its historically cheap valuation. CLF’s average P/E since it has become profitable is 10. By simply taking the historically average P/E times 2011 earnings I get a target price of $131.90. A more intensive RULE #1 calculation returns a 10 year intrinsic value of 235.80, which I divide by 2 to account for risk involved in my calculations. Still, at any price under $117.90, CLF represents good long term value. I used a growth rate of 20% for these calculations, which I believe is attainable, especially over the next 5 years.    

 

From a technical standpoint, it appears to me that CLF may be nearing a short term bottom. The MACD and STOCH are showing divergence. This is shown by the red lines on the chart below. The green line represents short-term resistance, which CLF has just recently broken above on average (I prefer to see at least 1.5x daily avg volume for a true breakout) volume. If CLF can get above the 50 DMA, it could retest the prior highs around 102.50. I will be watching that level closely to determine if it has the strength to power through that resistance. I would consider selling it at that time if CLF cannot breakout above that level.        

 
There are two factors to keep an eye on that could negatively impact CLF. The first being the debt issues in Europe. These issues could derail our current recovery and potentially drive us toward the dreaded double dip recession. The other factor is the recent strength of the US dollar, which is somewhat tied to Europe’s recent debt issues. If the dollar continues to gain strength, CLF will have difficulty breaking to new highs. 

*Financial data sourced from Yahoo Finance.

Author is long CLF.