Is Cliffs Natural Resources Inc. (CLF) a Good Stock to Buy?

Iron ore and metallurgical coal company Cliffs Natural Resources Inc. (NYSE:CLF) has been pounded by weak demand for steel in the last year (metallurgical coal is used to produce steel, as opposed to thermal coal which is a fuel for electric utilities). The stock is down 70% in the last year in what has been a more or less steady decline, while the S&P 500 index is up. A number of market players are still bearish on Cliffs, going by the fact that the most recent data shows 23% of the outstanding shares held short. However, Wall Street analysts are forecasting a recovery at the company, with consensus earnings for 2014 implying a forward P/E of 9.

In 2012, revenues decreased 11% from a year earlier (though sales were higher than in 2010). A large impairment charge caused Cliffs to report negative operating income; if we add back impairments, we still get a heavy decline in operating income due to the fact that cost of goods sold was actually higher in 2012. Pretax income seems to have been down by over 75% after addbacks. The decline seems to have moderated in percentage terms by the time we get to the end of the year- specifically, revenue was down only 4% last quarter compared to the fourth quarter of 2011- but that is still a hardly promising sign. Adjusted EPS for the quarter were 41 cents, which when annualized would give an earnings multiple of 13; at that valuation we like to see at least modest earnings growth.

Part of our work is tracking 13F filings from hedge funds and other notable investors, using them to develop investment strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). We can also use this information to review holdings of Cliffs Natural Resources Inc. (NYSE:CLF) as of the end of December. For example, billionaire Steve Cohen’s SAC Capital Advisors increased its holdings of Cliffs by 11% during the fourth quarter of 2012 to a total of 3 million shares (see Cohen’s stock picks) while Fisher Asset Management, managed by billionaire Ken Fisher, reported a position of about 830,000 shares at the end of December. Find Fisher’s favorite stocks.