Gordon Johnson Sees Cleveland-Cliffs Below $4, Initiates With A Sell

Cleveland-Cliffs Inc CLF will release guidance next week, and if its figures rest on current steel prices, one analyst advises shorting.

The Rating

Vertical Research Group analyst Gordon Johnson initiated coverage on Cleveland-Cliffs with a Sell rating and $3.87 price target.

The Thesis

Johnson anticipates a “sharp correction” in Cleveland-Cliffs shares over the next three to four months as China steel mill margins continue to “tank,” catalyzing plunges in iron ore prices and Cleveland Cliffs’ stock. (Seen the analyst's track record here.) 

“In short, with the majority of investors focusing on CLF’s coming 2018 guidance (which many expect to be impressive given where U.S. HRC/iron ore prices are today) as well as Trump’s Section 232 decision, we see the current ‘trouble’ brewing in the world’s most important steel market (i.e., China) as largely flying under the radar,” Johnson said. 

By his assessment, a current emphasis on U.S. scrap prices and steel-mill lead times and imports overshadows critical conditions abroad, including waning Chinese steel and Turkish scrap prices, as well as spiking steel inventory in China.

These circumstances compound risk to U.S. metals and iron ore prices, as well as expectations for President Donald Trump’s upcoming Section 232 decision to strike Chinese imports.

Considering similar pricing levels as those in early 2017, which initially justified encouraging guidance but eventually forced forecast reductions that halved the stock price, Johnson advised shorting on any guidance built on current hot-rolled coil and iron ore prices.

Price Action

Cleveland-Cliffs was trading down nearly 2 percent at $8.25 in the Friday morning session. 

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