Cliffs Natural Resources: Long, hot summer for shareholders?

Cliffs Natural Resource's numbers are likely to be quite good for the rest of FY 2017, but traders are still dumping the stock due to last quarter’s unexpected loss.

Taconite pellets, a semi-refined iron product produced by Cliffs Natural Resources for its numerous steel mill customers. (Photo via Cliffs Natural Resources.)

WASHINGTON, May 6, 2017 – This column has been taking a nap for a few days and is likely to continue doing so. The reason why? Not much to do in our portfolios one way or another.

Virtually all our positions have been eroded a bit, price-wise, over the last few trading sessions as various business and government complexities and assorted disturbing world events have added to stocks’ generally traditional summer doldrums.

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Despite Republican control of two of three government branches and presumed influence over the third, gridlock continues in the nation’s capital. Both stubbornly ideological Republican factions and Congressional Democrats’ absolute refusal to cooperate in passing any legislation that could be regarded as a Republican win have combined with a viciousness and vacuousness that are making us wonder whether Barack Obama really did have no other choice than to lead this country with his pen.

We’ll suppress that thought for now, however. It’s really too depressing to consider.

Trading Diary

All we’ve been doing is some essentially meaningless shuffling of positions. We’re not fully invested, having already done some pre-emptive “Selling in May.” But we still like most of our wobbling positions for the longer term and are willing to hold on for now.

A slight exception is our too-large position in miserably failing U.S. iron mining giant, Cliffs Natural Resources (symbol: CLF). Defying a large, market-wide short position in the stock (roughly 16 percent as of last count), we bought into these cheap shares too high, as it turns out, and have been paying the price ever since.

To keep our near-term losses in CLF to a minimum, we’ve had to do something we don’t often do, namely, sell off small parts of the original position at nasty losses, percentagewise. This reduces our over all cost and exposure on our remaining position. But that position will have to make up for the current losses for this strategy to be a success.

Cliffs Natural Resource’s numbers are likely to be quite good for the rest of FY 2017, but traders are still dumping the stock due to last quarter’s unexpected loss. That, however, was mainly due to the company’s wise decision to pay down more of its debt, restoring to some extent the company’s luster – and balance sheet – both of which had nearly been wiped out a few years back by Obama’s War on Coal.

At the time Obama launched his attack on coal and, for that matter, all U.S.-based fossil fuel activities and consumption, Cliffs was also a major player in the coal mining sector. Having got rid of its coal mines entirely at horrendous losses, Cliffs has fought back to what is arguably long-term respectability.

But shorts are still shorting the daylights out of the stock, scaring the longs so much during the last quarter that every time Cliffs shares try to mount a comeback, they’re immediately hit with another wave of selling by shareholders who just want out at any price.

Sadly, we’ve had to do some of this ourselves, knowing full well what the shorts are doing. We are still somewhat overexposed in this sector – our bad – and need to sell back to a reasonable-sized position. It’s irritating, but frankly, we underestimated the sheer tenacity of the shorts as well as the palpable fear they’ve put into the hearts of remaining longs.

For that reason, each time we see a nice percentage jump in these shares on good volume, that jump, and more, are routinely wiped out, and more, by the next day’s armada of sellers. Some days we get the sense that more Cliffs shares are being sold than actually exist. Depressing.

However, remaining FY 2017 numbers still look promising, and all the stock needs to achieve salvation are convincingly good numbers for the next quarter. Such numbers would validate our original bet that this comeback stock is ultimately going to do well enough in coming quarters to cause the massive short-squeeze we originally anticipated when we decided to load up on this position.

Fingers crossed. If we’re right, we’ll win in the end. If not, we’ll be gagging on red ink in this position before Santa Claus comes to town.

Our other big position in Allergan convertible preferred “A” shares (AGN/PRA at our brokerage, your symbol may be different), has taken its usual post-fat-dividend drop, aided and abetted by the swoon of parent company Allergan (AGN) and the pharma stocks in general. Obamacare continues in its death spiral and threats rain down on the healthcare industry via the usual Capitol Hill suspects, hurting these stocks at least in the short term.

That said, unless the worm has permanently turned, my late father swore on this sector as well as the long term value of its traditional fat dividends (Allergan excepted), and it’s how he made most of his money in his investment / retirement portfolio. That said, we’ve been living in a different world in this sector since he passed away in 2009, and I’m wondering what he’d think about his overrepresentation in this sector today.

Bottom line, we’ll stick with AGN/PRA until it’s redeemed at par – $1,000 per share – next March 1. In the meantime, we continue to collect a more or less 7 percent quarterly dividend based on our average purchase price, which is considerably below $1,000 at the moment.

This means we’ll have the rare opportunity to make a swell capital gain on a normally boring preferred stock, just as long as Allergan stays in business, which the Botox maker is likely to do as long as Boomers keep getting older. Which they will. This potential win might help redeem the tears we’re currently shedding over CLF.

Stay tuned.

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