WASHINGTON, May 8, 2017 – The “Sell in May” mantra seems to be gathering strength and conviction in recent stock trading action, despite the fact that market averages hit new highs last week. More and more stocks are not participating in this upward ratchet, and the underlying selling pressure, particularly by professional investors, is getting pretty obvious.
As we noted last week, our portfolios have been doing good to okay, with one or two notable issues.
We continue to wring our hands over the fairly large, bullish position in iron ore miner Cliffs Natural Resources (symbol: CLF) we gradually accumulated earlier this year in our smaller trading account.
Initially, the stock did not disappoint, hitting new highs after several years of doldrums. Another victim of the Great Recession, the Cleveland-based company underwent a lengthy near-death experience as it was forced to sell off its entire coal-mining portfolio, courtesy of the Obama Administration’s highly successful War on Coal. But it’s recently recovered quite strongly, which led to our recent position.
However, one thing that gave us pause was the notably large short position in these shares. The upside of such a position is that a stock like Cliffs can benefit from a massive short-squeeze (forced buying) when it reports decent or better-than-expected quarterly earnings. On the other hand, just one or two seriously determined short-sellers can keep driving the darn stock down, hitting stops and stop limit orders on the way down and worsening the situation even if the company is actually doing better.
It’s clear to this trader at least that at least one determined short-seller is playing games with those fundamental investors – like this one – who are still holding the stock based on its impressive recent recovery and return to profitability.
Our suspicions were confirmed late last week by a series of events that publicly pitted Cliffs’ current CEO, Lourenco Goncalves – the man largely behind the company’s turnaround and gradual recovery – against Gordon Johnson of Axiom Capital, a longtime CLF bear who, to this writer at least, is nursing a large, open short position in the stock and isn’t beneath using the media to boost investor selling, which would benefit such a big short position.
The influential periodical Barron’s was his vehicle of choice last week. In an article noting that CEO Goncalves was buying significant amounts of Cliffs’ shares on the current weakness, Barron’s seguewayed into quickly allowing Johnson to take over the argument:
“Goncalves is certainly not buying into strength. Shares of Cliffs Natural Resources have lost more than a quarter of its value this year , including a 6.8% drop on April 27 after reporting earnings. But Axiom Capital’s Gordon Johnson contends investors should avoid Cliffs. He explains why:
“‘While we find CLF’s CEO Lourenco Goncalves comments on his conference calls “legend,” his investment prowess in buying CLF’s stock has not been good. In fact, the last time Mr. Goncalves made a substantial purchase of CLF’s stock was 3/4/15…when it was essentially at where it is today (i.e., the stock was trading at $6.72/shr as of 3/4/15). How did that work out for Mr. Goncalves? Well… by 1/12/16 (a short 10 months later), the stock had fallen to $1.26/shr, or a -81.3% loss on his purchase. Thus, we believe today’s purchase by Mr. Goncalves could actually be a strong SELL signal.
“‘Why? Well, as can be heard with his “epic” conference call comments, he seems to be the most bullish right ahead of the most bearish of times for the iron ore markets – which…we feel we are in the beginning innings of.’
“Johnson is notoriously bearish on iron ore and steel–I can sense the hate mail arriving already–and it should be noted that Cliffs’ stock was upgraded to Outperform from Market Perform at FBR Capital a day after its earnings report, so make of it what you will.”
Goncalves lashed out at Barron’s and Johnson in a missive posted via Briefing.com (subscription needed to access all material) on May 4, accusing both of misrepresenting Goncalves’ trading activity, which resulted in a later emendation of numbers in the above quote, but not the substance or innuendo put forth by the article.
A CEO generally won’t fire a salvo like this unless he thinks a determined short-seller (in this case) is messing with his company’s stock price and, by extension, with investors in his company as well.
In any event, our position in CLF has proved at the very least an unwelcome short-term liability for our small portfolio, and one we can’t ignore. You have to start cutting your losses some time, or you risk damaging your performance for the year. For this reason, we’ve begun to pare our position in CLF shares little by little.
This violates our usual rule of just cutting such a position once it passes a certain loss threshold. But in this case, we are convinced that Johnson and others are playing a game with funds and small investors who are holding this position, and we’re determined to beat him at his game – but not with the current position, as he can afford the kind of risk we can’t.
We’ll see how things turn out next quarter. True, in the current quarter, Cliffs suffered a small but unexpected loss. Yet this was largely due to Goncalves’ highly aggressive moves to pay down, quickly, a large chunk of Cliffs’ outstanding indebtedness, which in the end is a very good sign. Perhaps the next quarter will give us the kind of short-squeeze we initially anticipated when we accumulated the position to begin with. Fingers crossed. We have no reason to doubt this will be the case, but these days, you never know.
In other portfolio news last week, one thing actually didn’t happen. We’re referring to the IPO in shares of Liberty Oilfield Services (BDFC), a small domestic oil drilling and exploration company. We mentioned we’d conditionally put in for shares of this IPO last week, although we were dubious on the issue, since it’s a small company and oil hasn’t been doing very well lately.
In our column last week on this issue, we noted
“In our opinion, this is absolutely the wrong time to IPO a company like this in a week when fears of a collapse in the oil industry are on the increase. But if the underwriters decide to discount these shares enough, we could change our minds. Right now, however, that doesn’t look likely.”
Looks like we weren’t the only ones that were dubious. While waiting for the final IPO price Thursday evening, we got a notice from our brokerage that the company and its underwriters had pulled the issue and so the offer was canceled. End of story for now. Clearly, last week’s oil price drop killed demand for these shares to the point where the parties involved decided to yank the issue and wait for a sunnier day. If and when we see this deal again, we’ll take a look.
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