Cleveland-Cliffs

Cleveland-Cliffs Could Rally to 40

Flat roll steel producer Cleveland-Cliffs Inc. (CLF) is pulling back after doubling in price in less than two months, nearing support that could offer a low risk buying opportunity. Spot steel prices fell from $1,700 in Q4 2021 to $1,200 in Q1 2022 but CLF’s specialized products commanded higher prices, highlighting a market edge that could persist for many years. Ukraine and record inflation are acting as tailwinds in this phenomenon, predicting that CLF will trade at much higher levels in coming months.

Top Dollar for Flat Rolled Steel

The company is expected to generate record 2022 cash flow, lifting from $2.1 billion in 2021 to around $2.9 billion this year. The stock trades at just five times free cash flow and five times estimated 2022 earnings-per-share (EPS), making it a far cheaper bet than mid-sized tech stocks crashing to earth this year. Better yet, Cleveland-Cliffs’ current price-to-earnings ratio (P/E) is lower than the 7x average of the last few years, limiting secular risk.

CEO Lourenco Goncalves touted record first quarter results after the April report, trying to ease chronic investor skepticism. As he notes “Our first-quarter results are a clear indication of the success we have been able to achieve as we renewed our fixed-price contracts last year. Despite the decline in spot prices for steel from Q4 to Q1 and its lagged impact on our results, we were able to continue to deliver strong profitability.”

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating based upon 6 ‘Buy’ and 5 ‘Hold’ recommendations. The lack of analyst coverage illustrates long-term apathy for the steel sector after a multi-decade downturn. Price targets currently range from a low of $23.50 to a Street-high $47 while the stock is set to open Thursday’s session just $3 above the low target. This modest placement, taken together with the excellent technical outlook, suggests significant upside in coming quarters.

Cleveland-Cliffs fell to a 29-year low in 2016 and turned higher, entering an uptrend that stalled in the lower teens in 2017. It posted a higher low in March 2020, ahead of a breakout that settled in the mid-20s in the summer of 2021. The stock rallied above resistance in March 2022, reaching a 9-year high at 34.04 before entering a pullback that’s now approaching breakout support. Weekly Stochastics has reached the oversold level while the monthly indicator remains in a buy cycle, setting up an ideal combination for buy-the-dip strategy, ahead of new upside.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.