Cliff Natural: Iron Ore Rebound?

08/08/2014 7:00 am EST


Joon Choi

Senior Portfolio Manager, Research Analyst, Signalert Asset Management LLC

This featured company focuses on mining iron ore and coal from the US, Canada, and Australia (85% of revenue in 2013 is from iron ore and 15% from coal), observes Joon Choi in Systems & Forecasts.

Cliff Natural Resources (CLF) is closely tied with global economic conditions (does well during economic expansion and busts during contraction).

The stock appreciated 525% from September of 2006 to June of 2008 (expansion period) and declined 87% during the next nine months (contraction period).

CLF then gained 359% from March of 2009 to March of 2011 as the global economy recovered from the financial crisis but the stock is down 76% since.

The stock price has been under pressure since 2011 because of two primary reasons:

1. The high stock price in 2011 coincides with the start of the European debt crisis and the slowdown in Chinese growth. A lower demand for steel created excess supply which resulted in lower prices; thus lower profit for CLF.

2. As renewable energy—such as solar and wind—became cost effective, the use of coal became less popular. As a result, coal prices went from $79 to $60 since 2011. A lower price of coal made CLF less profitable.

Meanwhile, global demand for metal has picked up recently as European economies have started to grow again and demand for cars in the US has picked up significantly.

I believe the stock market is long overdue for a correction, but there are some stocks that still look attractive even in this climate. One of those stocks is Cliff Natural Resources, which I believe has bottomed and is poised to break out.

Technically speaking, CLF seems to have bottomed as the stock recently bounced off $13.78, which is an important support level that dates back to 2005.

The monthly chart of CLF seems to indicate a major up move is about to occur and the demand for steel may increase due to healthier global economies than in 2011, when the stock price last topped out. My target price is $27.17, which is 59% higher than the intraday price of $17.13.

Here are three ways to invest in CLF:

1. Buy the stock—maximum profit potential with unlimited loss potential.

2. Buy the stock and sell calls against it to create a covered called position.

3. Buy the $18 call, which caps the loss at $1.04 (6%) while participating in unlimited upside.

Although a high P/E ratio is a bit of concern, I believe the stock has bottomed and will continue to rise. The investment horizon for CLF is about three-to-six months, possibly closing the position before the next earnings on October 22 if there is good profit to take off the table.

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