Cleveland-Cliffs: A Coming-Half-Year Capital Gain Prospect (NYSE:CLF)

Investment Thesis

Identification of high-probability capital gain opportunities in this 21st century requires more active comparison input refreshments than were needed in the slower-moving last-half of the 20th century.

Technology advances in communications, basic sciences, information management, competitive strategy, human biology understanding and international relations, all contributing to greater, more rapid development of uncertainty confronting investors.

This makes essential the input of more frequent forecasts of likely future-developments. Ones with shorter forecast-time horizons necessary to minimize error-heightening outcomes.

In response, we favor obtaining forecasts from the likely best-informed players in the equity investment game, the major funds of “institutions”. To avoid other investors “front-running” them, they won’t tell what they uncover. But necessary market-making technology provides a “leak” revealing what they expect and try to accomplish. We exploit that to get possible advantage for our strategy.

The following comparison of Market-Maker expectations for Cleveland-Cliffs, Inc. (CLF) with expectations for those of CLF’s competitors should illustrate some of the potentials.

First, a quick description of the primary subject-company.

Description

Cleveland-Cliffs Inc. operates as a flat-rolled steel producer in North America. The company offers carbon steel products, and advanced high-strength steel products; stainless steel products; plates; and carbon steel, stainless steel, and electric resistance welded tubing. Further, it owns five iron ore mines in Minnesota and Michigan. The company serves automotive, infrastructure and manufacturing, distributors and converters, and steel producers. Cleveland-Cliffs Inc. was formerly known as Cliffs Natural Resources Inc. and changed its name to Cleveland-Cliffs Inc. in August 2017. The company was founded in 1847 and is headquartered in Cleveland, Ohio.

Source: Yahoo Finance

The competitive scene

Steel is a world commodity of wide diverse utility, durability, and transportability, making its prices subject to cyclical supply and demand imbalances on an international basis. Here are the risk~reward stock exposure/opportunities among major competitors in the USA, as seen by institutional investors at the present time.

Figure 1

(used with permission)

The tradeoffs here are between near-term upside price gains (green horizontal scale) in each of the stocks, seen worth protecting against by Market-makers with short positions, and the prior actual price drawdowns experienced during holdings of those stocks (red vertical scale). Both scales are of percent change from zero to 25%.

The intersection of those coordinates by the numbered positions is identified by the stock symbols in the blue field to the right.

The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions and the actual worst-case price drawdowns from positions that could have been taken following prior MM forecasts like today’s.

Our principal interest is in CLF at location [3]. A “market index” norm of reward~risk tradeoffs is offered by SPDR S&P 500 index ETF at [6].

Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. The protective actions are taken with real-money bets defining daily the extent of likely expected price changes for thousands of stocks and ETFs.

This map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor’s choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others, as now seen for the stocks in Figure 1.

Comparing Alternative Investment Details

Figure 2

(used with permission)

Column headers for Figure 2 define elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with pink background “fills” signify conditions typically unacceptable to longer-term “buy” recommendations. Yellow fills are of data for the stock of principal interest and of all issues at the ranking column, [R].

Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for CLF.

Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of: a) How BIG the price gain payoff may be; b) how LIKELY the payoff will be a profitable experience; c) how soon it may happen; and d) what price drawdown RISK may be encountered during its holding period.

The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ “institutional” clients.

[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are most likely to accept losses.

[H] tells what proportion of the [L] sample of prior like forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences and [N] suggests how credible [E] may be compared to [ I ].

Further Reward~Risk tradeoffs involve using the [H] odds for gains with the 100 – H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [fom] ranking measure [R] useful in portfolio position preferences. Figure 2 is row-ranked on [R] among candidate securities, with CLF in top rank.

Along with the candidate-specific stocks these selection considerations are provided for the averages of nearly 3500 stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom) of those forecasts, as well as the forecast for S&P 500 Index ETF (NYSEARCA:SPY) as an equity market proxy.

The present uncertainties in the equities market at large are seen in the [T] column of the SPY row, its background shaded in pink where the Reward~Risk tradeoff of SPY’s columns [E] and [F] are +11% and -10%, an unusually high level of price drawdown exposure for the broad market index. SPY’s Sample Size of 6 (out of 1,261 market days of the past 5 years) tells how unusual is today’s Range Index of 22, uncharacteristically low. The high level of world uncertainty from Russia’s invasion of Ukraine is likely the cause. In Figure 1, SPY at [3] is located up close to the diagonal, instead of being down usually around and to the left of where CLF is at [6].

For the steel stocks, the forecast price ranges in column [S] average a high 32% above each low, indicative of their inherent price uncertainty. In comparison, that average is twice the 15% of the market index ETF, SPY. But volatility can offer reward as well as risk, so investor perception and attitude make the difference.

Recent Trends in MM Price-Range Forecasts for CLF

Figure 3

(used with permission)

The forecast and forecast history in this Figure 3 repeat the data used to compare the prospects for steel industry competitors. The vertical lines of the graph are range forecasts of coming prices made daily during the past 6 months. The heavy dot in each range is the stock’s closing price on the day the forecast was made.

The last 11 days on the right side of the picture are illustrative of the price sensitivity of this stock and its industry, as perceived by the institutional investment community. The forecasts of the Market-making community in response to block trade orders initiated by client institutions. They make clear the short-term opportunities present here in CLF.

Its price on Friday was within $1 of the past 52 weeks high, yet another +13% rise near-term is seen likely enough to be protected against by borrowers of shares needed to fill those institutions’ orders. Every time in the past 5 years such an insistent buy imbalance has occurred, the upside price target seen at the time was reached. Now, despite the 100% history, that is no guarantee the future will be like the past, but the odds for buy profitability here appears pretty good.

The frosting on the cake comes from the prior experience history, showing that those priors averaged payoff gains of over +20%, half again as much as is now being forecast. And those position targets only took 38 market days – less than two calendar months – to be achieved. The CAGR (annual rate of profit compounding) in these prior instances was over 200% a year.

Prospective Odds & Payoffs

Figure 4

used with permission

This comparison map uses an orientation similar to that of Figure 1, where the more desirable locations are down and to the right. Instead of just price direction, the questions are more qualitative: “how big” and “how likely” are price change expectations now?

Our primary interest is in CLF’s qualitative performance, particularly relative to alternative investment candidate choices. Here CLF is at location [2], the intersection of horizontal and vertical scales of +20% gain and +100% assurance (odds of a “win”).

As a market norm, SPY is at location [7] with a +13% payoff and an 100% assurance of profitability. CLF tends to dominate all the others in this comparison.

Conclusion

The stock I first knew 50+years ago as only a Minnesota Iron Ore mining participant shipping across the Great Lakes to Cleveland, now has become fully integrated into a major industry participant seen by big-$ investors as able to effectively compete with the former Dow Jones Index component United States Steel Corporation (X) and all other industry figures.

The comparisons data presented above urge belief that investors seeking a near-term wealth-building opportunity have a good one at hand at this point in time in Cleveland-Cliffs, Inc.