Cleveland-Cliffs Rocks: This is how I trade stocks

The core of the reopening game. Well, one of the cores anyway. The materials reporting and sales growth has been excellent.

Last week, Alcoa (AA) beat both the top and bottom lines, setting a record net income and positive outlook for the current quarter. Friday we hear from Southern Copper (SCCO). But today is Thursday. Thursday was already a big day for the group.

This morning we have already seen Action Alerts PLUS Holding Nucor (NUE), a company considered by some to be the best in the steel class, reports a double blow for its second quarter, which included 103% revenue growth, while forecasting a record third quarter.

Freeport-McMoRan (FCX) posted a decline in profits, a drop in sales that continued to deliver 88% sales growth, while raising prospects for copper production.

Then there’s Dow Inc. (DOW) — beats for both profitability and sales. Sales there (+66%) beat Wall Street estimates by more than a cool $1.1 billion.

I’m already in AA (up small), FCX (down small) and SCCO (up really, very small), but one I’ve thought of, but not in, is Cleveland-Cliffs (CLF). Cleveland-Cliffs also reported Thursday morning.

Cleveland Rocks I think

For the second quarter, Cleveland-Cliffs posted adjusted earnings of $1.46 per share, which was missed by a penny. GAAP EPS came in at $1.33. That was clearly missing.

Monetization was a different story, beating the Wall Street consensus with an imprint of just over $5 billion, which accounted for 358% annual growth, give or take. Both that $5 billion and the $795 million net income it produced were quarterly records for the company.

Adjusted EBITDA for the second quarter was $1.4 billion, comparable to (or not quite comparable to) – $82 million for the second quarter of 2020.

In steel production, which is the main activity here, Cleveland-Cliffs produced 4.205 million net tons, compared to 614,000 net tons in the same period a year ago. The product consisted of 33% hot rolled, 30% coated, 17% cold rolled, 6% plated, 4% stainless and 10% other. On the demand side, 40% of the product went to distributors and converters, 27% to the infrastructure and manufacturing market, 23% to the automotive industry and 10% to other steel producers.

Looking at the balance sheet, we see that cash has been slower over the past six months, but accounts receivable are almost double, which more than makes up for the difference, bringing current assets up 21% for the year to date. Total assets are also higher, despite the company cutting its “goodwill” entry, which we’d like to see. Almost nothing has changed on the liability side. Current liabilities are overshadowed by current assets.

There has been no “material” change in the picture of long-term debt, although the number is uncomfortably high relative to equity. That’s probably why the stock is trading at just 3 times forward-looking earnings. The long-term pension obligations are lower. Total liabilities outside of equity are slightly lower than six months ago.

The balance sheet is of course unbalanced due to the long-term debt burden, but has not deteriorated. Cleveland-Cliffs has access to approximately $2.1 billion in liquidity when needed.

Outlook

For the current quarter, CLF expects adjusted EBITDA of approximately $1.8 billion and free cash flow of $1.4 billion. Chairman, President and CEO Lourenco Goncalves said: “Demand for steel remains excellent and, as we continue to negotiate our contract business with various customers in different sectors, this is gradually translating into significantly higher contract prices later this year and into 2022. We are poised for a monumental debt reduction in the second half of this year and reaching zero net debt by 2022.”

All I can say to that is “Sign me up”. That would be an achievement.

The charts

The stock fell 6% on Thursday morning. One can easily see a mild downward trend since mid-June. That’s with the group.

Recently, the stock lost the 21-day exponential moving average (EMA) and the 50-day simple moving average (SMA). Taking those lines back will be a short-term battle.

Take a look at this.

Coming back to the pandemic lows, there have been two distinctly different periods of acceleration, the first markedly more aggressive than the second, separated by a peak in December 2020. The whole of the 18-month move, in my opinion, puts Fibonacci support at its worst. possibly in the $16.50 region, and whether a potential target price should remain high and if the company maintains the pricing power it expects, of $26.

Trade idea (minimum lots)

— Buy 100 shares of CLF at or near $20.20.

— Sell (write) one CLF $26 call for about $2.15.

Net Base: $18.05

Note 1: Should the stock rise above $26 at maturity, the trader will be called away at $26 for a 44% net gain.

Note 2: I like this trade. I think I’ll set it up, or something like that, as soon as this piece is published and you have a chance to trade for me.

(NUE is a holding in Jim Cramer’s) Action Alerts PLUS Member Club. Would you like to be warned before Jim Cramer buys or sells this stock? Learn more now.)

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