Is Cliffs Natural Resources Undervalued?

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With shares of Cliffs Natural Resources (NYSE:CLF) trading around $21, is CLF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Cliffs Natural Resources is a mining and natural resources company that engages in the production of iron ore pellets, fines and lump ore, and metallurgical coal. It operates several iron ore mines, five metallurgical coal mines, and a couple of thermal coal mines across various countries around the world. Basic materials have not seen significant strength this year, although economies around the world are growing at explosive rates. Infrastructure development and constructions worldwide should fuel a surge in basic materials and in turn, a rise in Cliffs Natural Resources stock. As countries continue to grow and improve, look for companies like Cliffs Natural Resources to see rising demand.

T = Technicals on the Stock Chart are Weak

Cliffs Natural Resources stock has seen a significant decline over the last several years and is now trading at prices not seen since early 2009. A recent positive earnings reaction has propelled the stock higher so rising stock prices may be ahead. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Cliffs Natural Resources is trading below its declining key averages which signal neutral to bearish price action in the near-term.

CLF

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Cliffs Natural Resources options may help determine if investors are bullish, neutral, or bearish.

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Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Cliffs Natural Resources Options

59.03%

6%

5%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Cliffs Natural Resources’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Cliffs Natural Resources look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-74.90%

-976.54%

-85.78%

-38.01%

Revenue Growth (Y-O-Y)

-5.93%

-4.23%

-26.05%

-9.96%

Earnings Reaction

14.98%

-19.99%

-10.51%

-6.26%

Cliffs Natural Resources has seen decreasing earnings and revenue figures over the last four quarters. From these figures, the markets have been mostly dissatisfied with Cliffs Natural Resources’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Cliffs Natural Resources stock done relative to its peers, Alpha Natural Resources (NYSE:ANR), Consol Energy (NYSE:CNX), Peabody Energy (NYSE:BTU), and sector?

Cliffs Natural Resources

Alpha Natural Resources

Consol Energy

Peabody Energy

Sector

Year-to-Date Return

-44.72%

-33.26%

8.61%

-23.07%

-8.56%

Cliffs Natural Resources has trailed in performance year-to-date.

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Conclusion

Cliffs Natural Resources provides essential materials to companies participating in a multitude of industries worldwide. The stock has been on a steady decline over the last several years but a recent positive earnings report may possibly fuel a move higher. Earnings and revenue figures have decreased over most of the last four quarters which has not made investors too happy. Relative to its peers and sector, Cliffs Natural Resources has been a year-to-date underperformer. WAIT AND SEE what Cliffs Natural Resources does this coming quarter.

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