Long way down

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CLF Stock Is a Sell – Cliffs Will Keep Falling off a Cliff in 2014

Cliffs Natural Resources (CLF), a mining stock that focuses mainly on iron and metallurgical coal, is one of Wall Street’s favorite dogs to kick around. CLF stock fell more than 30% in 2013, and is down more than 70% from its 2011 peak.

clf stock cliffs natural resources logoThe narrative behind Cliffs stock is simple: Materials and commodity stocks have been brutalized by a strong dollar holding back prices and weak demand from China.

But some pundits (myself included) think China manufacturing might have bottomed out and that a global recovery is in order in 2014. Furthermore, there are signs that the almost nonexistent inflation rates of the past few years are picking up.

But is Cliffs Natural Resources set for a comeback, or is CLF stock destined to keep circling the drain?

Unfortunately, I think it’s the latter. Here’s why:

Short Interest: CLF stock has been a target of the bears for some time, and clearly with success. However, short interest remains a hefty 34% of the float in Cliffs stock as of mid-December; that’s the highest level since September. Now, plenty of stocks with a lot of short interest gap up on a short squeeze — see Netflix (NFLX) and its 300% gains in 2013 powered by a short squeeze early in the year — and falling volume in CLF stock means that the shorts currently need roughly eight full days of trading volume to cover, which is the highest in more than a year. Still, the fact that bears are betting so heavily against this stock is telling.

Still Above Targets: Wall Street is notorious for putting overly optimistic price targets on stocks, so it’s telling that CLF is trading significantly under the average analyst’s target. Specifically, Bespoke Investment Group calculates a mean target of $23.21 for Cliffs stock — more than 12% above current levels. After a big flop like CLF stock saw in 2013, that’s not encouraging to see it still above Wall Street’s expected pricing level.

Earnings Pressure: Cliffs Natural Resources returned to profitability in 2013, but remains a shadow of its former self. And while operations are in the black once more, the bottom line is that 2014 will be worse for the bottom line. Earnings are set to fall between 25% and 30%.

Revenue Pressure: While CLF stock did manage to finally post a year-over-year increase in sales for Q3, the fact remains that five out of the past six earnings reports showed declining revenue. Revenue for Cliffs should finish 2013 down about 4% from 2012 numbers, and Wall Street is forecasting another 5% to 10% decline in fiscal 2014, too.

Valuation: Even after all the negativity and losses, Cliffs still is valued at more than 13 times its fiscal 2014 profits! That’s right in the middle of the pack for the materials sector — meaning that at best, the company is fairly valued after big declines for CLF stock in the last few years.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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