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Evergrande is less grande than ever. Plus: New ideas for hated stocks

Written By | Oct 19, 2021
Cleveland-Cliffs, HBI, Evergrande, hated stocks

Cleveland-Cliffs’ new HBI plant in Toledo brings real innovation back to the American steel industry. Photo via the Cleveland-Cliffs YouTube channel.

WASHINGTON – Only dimly followed by a media establishment more enamored of Prince Harry and Megan and the incredible disappearing Joe Biden, China’s Evergrande real estate and financial crisis still hovers ominously on the investing horizon. That’s today’s lead topic. But we also have some ideas for investing in hated stocks for fun and profit.

But first…

China’s Evergrande mess: The CCP’s answer to the 2008 collapse of Lehman Brothers?

Reminiscent of the kind of real estate / finance company mess that caused the Great Recession (2008-2010) here in the US, failing Chinese conglomerate Evergrande has already been partially bailed out by the Chinese government. The CCP appears to favor a continuing bailout via its two-prong strategy of saving Chinese investors while stiffing international investors. That’s one way to help pay for this mess.

The Twin Tylers of ZeroHedge take things from there in a Tuesday post. (Bold text via ZH.)

“One month ago, when the world was gripped by the crisis involving China’s 2nd largest property developer Evergrande, we said that “Beijing will pay local bondholders and soft nationalize Evergrande, but will avoid allegations of backsliding on tightening/deleveraging promises and “common prosperity” by stuffing foreign creditors.”

“Since then, that’s precisely what has happened with the company making one onshore coupon payment while withholding all payments to offshore creditors. Then, overnight, Reuters reported that Hengda Real Estate Group, Evergrande’s flagship unit, has remitted funds to pay an onshore bond coupon of 121.8 million yuan ($19 million) due on Tuesday.

“Citing sources, Reuters noted that the company needs to prioritize its limited funds towards the domestic market where the stakes are much higher for the country’s financial system.

“Yet while Evergrande has been careful not to impair local creditors, offshore bondholders have little to look forward to: an Evergrande bond due March 23, 2022 will officially be in default on Oct 23 when the 30-day grace period for a missed coupon payment that had been due on Sept. 23 expires.”

Evergrande bagholders: Beware!

Read that last paragraph again. It looks like offshore bondholders – i.e., American investors and easy marks in other countries – will likely get caught holding the bag when the financial axe finally falls on Evergrande’s Ponzi scheme, likely on October 23, 2021. That’s this coming Saturday.

Adding insult to injury, the Tylers conclude their analysis with this unfortunate – but likely true – financial analogy.

“In an attempt to ease mounting concerns about China’s sudden property deep freeze, in the past few days, the People’s Bank of China has said spillover effects on the banking system from Evergrande’s debt problems were controllable and that China’s economy was ‘doing well.’ Just like what we heard around the time Lehman failed.”

We have no idea whether the impending implosion of Evergrande – which includes its hapless international debt holders – has the capacity to make a significant impact on US investors and financial institutions. But we’re likely to find out soon. So we may need to mind our portfolios between now and next week.

Any sign of weakness, particularly in financial holdings, bonds or even preferred stocks could send our current financial house of cards down the rabbit hole. And fast.

You never know what financial tricks Washington might come up with to stave off any impending financial disaster. But rest assured that the politicians and their mega-wealthy elite friends will move quickly to save themselves while the average Joe’s 401(k) portfolio could get pounded.

No need for panic. Yet. But watchful waiting right now might prove an excellent idea.

About those new ideas for hated stocks…

In other news, strange stock opportunities continue to exist on Wall Street. Our favorite holding these days, Cleveland-Cliffs (NYSE:CLF) continues to decline, albeit slowly, after last week’s stunning announcement.

The company made a deal to acquire one of this country’s biggest scrap metal company, Ferrous Processing and Trading. This, along with CLF’s new, highly successful hot-briquetting facility in Toledo, Ohio, could help finalize the transformation of this one-time iron ore and coal miner into America’s most cost-efficient electric-arc furnace steel producer.

The shares shot upward with a vengeance on the news last week. But, as usual, they began almost immediately to settle back down into their current trading range. Tech-obsessed Wall Street just doesn’t get this transformational miracle. Why? Old-style material / industrial stocks like CLF don’t attract analyst attention quite the way tech stocks do.

Over a lengthy investing career, I’ve often found pursuing hated stocks that still boast at least decent financials can prove rewarding. It’s an excellent way to make money in a sideways market like this one. That’s why hated stocks like CLF, which had a near-death experience earlier in this century after Green Meanie Barack Obama swiftly eviscerated America’s coal industry, can and sometimes actually do make painful yet successful comebacks.

More on CLF, the invisible US Industrial Success Story of 2021

In the case of Cleveland-Cliffs, an aggressive new management team systematically dumped all the company’s significant international coal holdings. Repairing the company’s balance sheet, they decided to focus strictly on mining iron ore. They eventually built this company into something entirely different, a highly efficient, vertically integrated steel manufacturing company.

Cliffs’ investments have already begun to pay off and will continue to do so; assuming America can dodge a possible recession in 2022. Most analysts, among the few that actually follow this company, seem to agree. With the stock still hovering around $21+ per share, after recent peaks around $26+ per share, and with positive analysts predicting a peak price of around $36 per share, there’s room to run in these shares. That’s why we’re back nibbling at CLF shares every time they get hit.

And they get hit quite frequently. The shorts continue their relentless attack on these shares, and the current short position remains in excess of 10%. The shorts paid dearly. Those equally relentless Reddit GameStop short busters discovered their big short position in Cliffs shares. So they hit them hard, causing a massive short squeeze in these shares a few months ago. They could return again if the short-selling nonsense continues to pick up again. Or not.

Without a current dividend, CLF shares remain volatile. But with a current PE Ratio (PE) of just 3.52, Cliffs is priced lower than an unloved utility stock, so it could remain an excellent trade for quite some time. (But see Evergrande above.)

Talk about hated stocks…wanna buy some coal?

While Cliffs wisely got out of the coal business years ago, that business still exists. A few coal companies continue hanging in there even as the Biden Admin Green Meanies continue to denounce all remaining US coal mining. Problem is, the Administration has also ended the Trumpian US energy revival by shutting it back down again. Which provides us with an interesting coal revival story, circa 2021.

You can see the results of the administration’s lousy “energy policy” in the price you pay for gas at the pumps. Arguably, you can also see this reflected in increasing consumer prices as well, since oil price increases also increase the cost of transporting goods. And check out your recent utility bills, too. You might need to call 911 or at least request EMS service.

Oil and natural gas prices have become so high that many coal-fired utility plants scheduled for permanent shutdown have been put on reprieve either by the companies themselves, or by state governments attempting to shut them down.

This, in turn, has led not only to price increases in once-again still-cheap coal. But it’s also led to increased international sales of American thermal coal to foreign countries (like China) that desperately need it to generate reasonably priced power. Particularly when it looks like the world is in for a colder-than-usual winter. Global warming Climate change, no doubt.

A pair of coal stock ideas, proving there can be new life for hated stocks

At any rate, this has spiked the prices of one or two left-for-dead coal stocks. At the top of the list is onetime giant Peabody Coal (NYSE:BTU). The company continues to post astonishingly good numbers under the circumstances. It may continue to do so for at least a couple more calendar quarters. (Already, winter has clobbered certain areas of the US.)

Meanehile, BTU is down sharply from its most recent spike. As a result, we’re cautiously accumulating shares.

Lesser known coal, oil and natgas company CONSOL Energy (NYSE:CEIX) looks like a similar situation. We may decide to get into this one as well.

Coal officially remains on this Administration’s Green Hate List. But right now, “green power” remains nowhere near being able to answer the nation’s peak power needs. (True internationally as well). So BTU and CEIX may prove excellent intermediate term trades.


Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17