Stocks to buy

Steel Tailwinds Will Beat Iron Ore Headwinds for Cleveland-Cliffs

In recent weeks, Cleveland-Cliffs (NYSE:CLF) has more or less traded sideways. CLF stock is still down a fair amount from its high of $26.51 per share. This is mostly due to falling iron ore prices caused by a cut in China’s steel output.

Source: Pavel Kapysh / Shutterstock.com

Fortunately, shares in Cleveland-Cliffs, which produces both iron ore and steel, seem to be finding support between $20 and $21 per share. With this, now may be the time to buy the dip.

Yes, its iron ore business may face headwinds from what’s playing out in China. But this hiccup will be countered by tailwinds in Cleveland-Cliffs’ steel business. These include the coming U.S. infrastructure boom plus another driver of demand set to appear next year.

The best part is that with all eyes on the iron ore situation, CLF stock trades at a discounted valuation. With a forward price-to-earnings ratio in the single digits, this is far from a “priced for perfection” situation. It’s time to buy before the market’s opinion shifts back.

The Good Far Outweighs the Bad in CLF Stock

Considering its transformation into America’s largest flat-rolled steel company, why is the iron ore situation weighing so heavily on Cleveland-Cliffs?

Yes, after the mega-mergers it completed with two steel producers last year, the company has seen a major change in its revenue mix. That said, as I discussed a few weeks back, CLF stock still has substantial exposure to iron ore.

While no longer Cleveland-Cliffs’ main business, iron ore does make up a fair portion of its annual sales. Given this factor, it makes sense why the falling price of iron ore has caused a slide in the price of CLF stock.

The silver lining, however, is that concerns about this headwind are overblown relative to Cleveland-Cliffs’ overall prospects. Continued troubles in the iron ore space pale in comparison to the big tailwinds emerging for the company’s steel production operations.

On top of the infrastructure boom, there’s another factor that points to more demand and strong operating performance for steel in the forthcoming quarters.

The market is underestimating Cleveland-Cliffs’ future results, as seen from the stock’s low forward multiple. Once investors and analysts realize they’re wrong, shares will be back on their way to higher prices.

Cleveland-Cliffs Can Easily Beat Expectations

Admittedly, there is some logic behind CLF stock trading for 4.1x this year’s projected earnings. It’s having a banner year in 2021.

But looking ahead to 2022, the sell side is not so sure. Analyst estimates project a fall in earnings per share (EPS) from $6.04 to $3.99.

Steel stocks like this one typically trade at low valuations due to the cyclical nature of the industry. As a result, Cleveland-Cliffs might not be as “deep value” as it looks on a stock screener.

Nevertheless, that doesn’t mean a big rise in its price isn’t in the cards for CLF stock. There is a path for it to deliver results that handily beat expectations.

Outside of increased infrastructure spending, there’s something else that points to strong results for Cleveland-Cliffs next year: a “return to normal” for automotive production.

This year, auto production has been impacted by the global shortage in semiconductors. But as this supply shock resolves starting next year, pent-up demand for vehicles could lead to greater-than-expected demand for galvanized steel, which is used to build cars and trucks.

Additionally, don’t forget about the company’s “monumental” debt reduction plans between now and year’s end. Cutting down its debt could have a materially positive impact on earnings as well, as paying down debt reduces its interest expense.

Some analysts, like Goldman Sachs’ Emily Chieng, are aware of these factors. She highlighted both its automotive and de-leveraging catalysts as reasons behind her recent “buy” rating on the stock.

But until the rest of the street comes to the same conclusion, the opportunity remains to get Cleveland-Cliffs at a favorable price.

The Verdict on CLF Stock

Investors right now may be lukewarm at best about Cleveland-Cliffs. Until the situation with iron ore prices is resolved, this is likely to remain the case. But in the months ahead, there are plenty of catalysts set to play out that could do wonders in terms of shifting investor sentiment.

Coming in with an A-rating in Portfolio Grader, it’s clear the market has it all wrong when it comes to CLF stock. Buy it now before they change their mind and send its price soaring.

On the date of publication, Louis Navellier had a long position in CLF. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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