Monday, June 5, 2017

At Its present Share Price CLF Is A No-Brainer

Cliffs Natural Resources (NYSE:CLF) is America's only pure play iron ore producer. It is solvent yet unloved. Its share price has dropped from above $12 to less than $6 within the past 90 days. I believe, subject to three unlikely caveats, that its share price is mathematically guaranteed to increase several dollars this year without any multiple expansion and that progression can continue because of the company's cashflow generation.
My caveats are:
  1. America's economy and industrial production doesn't dramatically collapse
  2. George Connell, former significant shareholder, didn't eliminate his position because of any undisclosed information
  3. Company CEO, Lourenco Goncalves, is an excellent manager and has a solid understanding of his business and industry.
Why should I expect to be rewarded by Cliffs when the "market" and most financial analysts do not think it is worth buying? Firstly, I've owned businesses and turned around several. Next, I've listened carefully to the CEO's conference call discussions and monitored his execution of stated goals. Finally, mathematics, subject to my caveats will push the share price back up.

At present, CLF has an Enterprise Value (NYSE:EV) of $3B (1.7 MC+1.6 Debt - 3 Cash). There are, using round numbers 300M shares outstanding. Management has targeted having net debt reduced to 1B or less by year end and operating with EBITDA equal to net debt in 2018. That $600M improvement likely will accrue to shareholders. Pretty well locked in cashflow should raise the stock $2 or 30+ percent within 12 months. Not bad! Company still worth $3B but the shares worth $8.
Now if any positive catalysts provide a lift and the multiple mentality improves, Cliffs could move well past $8 and the old recent high of $12+. What catalysts are possible?
  • Action on infrastructure spending and trade protection
  • Steel wholesalers restocking inventory to normal levels
  • Any announcement on additional DRI ready new customers, plant decision, or momentum swing on the Essar restructuring
  • Broad based and significant insider purchases
  • Better grasp of the benefits of customers being locked in and pricing that includes adjustments for inflation, IODEX pricing, Hot Rolled Coil pricing, and European pellet premiums. The world doesn't end if the Chinese spot prices decline. Management is running a company, not a lottery.
What happens if Cliffs stock price goes down further in spite of all of the above? Buy more shares and extend your time horizon. CLF has taken insolvency off the table by reducing debt and extending maturities so it should be able to still generate a significant cashflow that would be available to chip away at the remaining debt, maintain properties, and fund growth initiatives.
Second quarter results and forward guidance will be extremely interesting, however, as long as they are continuing to reduce the debt my belief is that the share price is going up.

Wednesday, October 16, 2013

Coming Up Empty

Too windy and cold to work in the yard or golf. Too lazy to do the items that remain on my to-do list. So, I spent a lot of time looking out the window. My view was an angry lake, but one of whitecaps basked in sunlight. Really beautiful with not a boat in sight. But lots of birds despite weather that humans dislike. Gulls were active and a couple of cormorants went fishing.

The entire time I watched, the two cormorants dived and came up empty. I was amazed how long they stayed down before resurfacing. Time and again, a deep dive and no fish. I hope their luck improved as they moved on down the shoreline. The behavior of those two cormorants reminded me of our government bodies, the Executive, the House, and the Senate.

All three bodies keep diving for fish, but come up empty. They take turns looking like ineffective fools. The birds dive in ernest and will catch a meal as they are focused on what is important. Our legislators and leaders are focused on diving, not what is important, eating. The process, image, and power take precedence over fish. Cormorants are smarter than Congress. Democrats and Republicans should now be called cormorons.

Lets hope the cormorons make some pretend progress today and eventually some real progress in straightening out the country's fiscal mess.

Tuesday, October 8, 2013

Greece Never Looked So Good

Think back to the Greek bailout discussions. The EU, central bankers, IMF, labor unions and bondholders all with a stake in attempting to look like they could solve a thorny problem. All that brainpower and their best plan was not to shut down Greece's monuments and trample on the people. It turns out that the Acropolis was shut down for about three days by a couple of hundred rouge union workers in protest, but the government sent in the troops to open it up for the people and the tourists. What a novel concept, keep open the venues that generate fees and taxes, if run privately, especially since it was already determined that the vacationing federal workers would receive all back pay. Greeks are better thinkers than American politicians. Sad.

I also do not recall the EU leaders intentionally talking down the markets. Our near socialist friends seemed to understand that depressed markets result in reduced economic activity and taxes. Again, the continental socialists have a better grasp of economics than our government leaders. Sad.

Finally, everybody connected to the European debt crisis was willing to negotiate, some more than others. Additionally, all of the parties didn't constantly say that they would not negotiate or deviate from their position. At least not publicly, daily. Sad.

To recap, the Greeks are better than American leaders at one, caring about their constituents; two, economics; and three,the art of negotiation. Sad again.

Thursday, October 3, 2013

Nature's Way

Things come and go. If they occur at the right time, for the right reason, there isn't a problem. Gazing out the window, thousands of gulls are still sitting in the lake, but soon they will move on. The pelicans arrived a few days ago and some have already headed South. Some migrating geese are joining the local guys and too will head off. This phenomenon occurs in humans also.

A division president of Jones Lang LaSalle quit to become CEO of HCP healthcare. JLL is a $4B marketcap company and HCP is an $18B outfit. CEO is better than division president. She was already a HCP board member so her decision was not made in a vacuum. Why wouldn't a manager take a more important position with a larger company, likely for more money? It's the natural thing to do.

Unfortunately, Wall Street also reacts naturally which means stupidly. Today they've taken about $4.00 off JLL's price presumably because of the executive departure. That 4% hit is about 3% more than the market's "government shutdown " impact. While headline panic seems to be the market's natural course, the reaction of a rational investor should be to buy and obtain a 3% headstart. I've been doing so today.

I can't think of another animal analogy, but another favorite of mine, Valmont Industries, has been taken out and paddled lately. It's gone from $130ish to $150ish and now back to $130ish. Ouch. Not for any good reasons that I can determine. So more cash goes from the sidelines into VMI and I hope it will help me go South this Winter.

Monday, September 9, 2013

Not The Best Reason To Add To A Position, But I Did

The best thing I can say about Devon [DVN] is that my basis keeps getting lower as I add to my holdings. It certainly hasn't been a financial winner. Past financial and operational engineering decisions all made sense to me, but it evidently didn't make actual sense as earnings have been inconsistent and the stock price has been lousy. The major change was selling all of their gulf and international properties and reducing debt to become a continental USA gas, oil, and liquids company. I still think that makes sense.

Over the last several weeks I've had a few strands of thought that have been intermingling. First, I've lightened up on some midstream MLPs as prices have been pushed high and multiples have been extended. That has changed to some degree as interest rates have risen, but MLPs are still priced richly. So I've taken some money off the table.

Next, Devon announced in June that it was going to do some more engineering and create a midstream MLP since those assets would be valued much higher than the market was giving DVN credit for them as a combined company. Given the MLP multiple of earnings, cashflow, and book versus Devons that seemed a no brainer. Assuming DVN sells those assets to the new MLP at similar multiples that should produce a lot of gain, cash, and share price improvement at Devon. 

The wife's been out of town for a week which left a lot of time for me and the dog to discuss whether I should up the ante again on Devon and anticipate some good reaction to the upcoming MLP. The answer came not from the dog, but from a very recent Jim Cramer article. Cramer named Devon as one of his 10 worst stocks and was not the least bit complimentary about company's management or prospects. So I bought some more even though I've had to fight the temptation to throw in the towel also over the past couple of years. 

The MLP is set for this Fall so we will shortly see if that or Cramer has any positive impact on DVN. If it doesn't I'll blame Gertie for not talking me out of the decision.

Wednesday, September 4, 2013

Three Quality, Two Really, Companies 20% Off Their Recent Highs Worth Buying

Since their arrival about a week ago, gulls have been using our no wake buoy as a soapbox. There's been a lot of important opinions offered. I have no ability to critique the value of their squawking, but some seem prouder of their messages than the less vocal.

After a long dry spell, Crusty is ready to do some squawking. Here are three companies worth looking at: Jones Lang LaSalle [JLL], Valmont Industries [VMI], and Vulcan Materials [VMC]. All are off their recent highs by about 20% with no terrible news announced. I've added to positions in JLL and VMI. VMC is a new long position for me. My last involvement with Vulcan was on the short side a number of years ago.

None of the three are screaming buys, but they are good companies at decent entry points with JLL and VMI oversold. VMC is finally starting to get some traction and will likely be able to grow revenue and earnings significantly next year. If they don't de-leverage by selling stock too soon, they will be able to really accelerate earnings as their three-legged stool of a business [public/highway, residential, commercial] finally sees demand in all areas.

Valmont has been doing well on all fronts and has positive trends going for it in agriculture, utility grid, and highway construction. The forward P/E is much lower than their historical multiple so not only can they grow earnings, but also should see some P/E expansion without stretching. Also, VMI is an Omaha company so they don't often shoot themselves in the foot. 

JLL is, in my opinion, the best of the commercial real estate brokerage/management companies. They don't take on a lot of risk for their own account [proprietary investments tend to stay in their investment arm for the benefit of customers]. They have a global presence and somewhat predictable revenues. 

The seagull stopped yacking and so should I. 

Wednesday, August 29, 2012

I'm Hopeful Flexsteel Will Not Join My Herd Of Turkeys

Gerts and I were out for our morning walk when I noticed a small herd[?] of wild turkeys in a neighbor's yard. They didn't pay any attention to us, but they got me thinking about my portfolio of under-performers. I often get enamored with a good company that seems to be a bargain, thus ensuring great profit, yet continues to languish for months or years before returning to an upward trajectory. These turkeys drive me crazy because I know I'm right and the market doesn't agree. Damn machines and kids!

Yesterday Flexsteel, the Dubuque, IA based manufacturer of furniture and seating, was taken out to the woodshed and paddled. It happened again this morning. I cannot find any bad news or forecasts. The company released record yearend and quarterly profitability, plus said current trends should continue.Sounds good to me.

FLXS doesn't have any debt and is paying a nice dividend. The yield is 3.0% and they are paying out only 25% of earnings. The current price is 1X book value, .4X sales, and less than 6X cashflow. Liquidity isn't an issue as they have a 4:1 working capital ratio. Looks like a well run Midwestern company.

I've pushed the buy button several times today and hope to get back quickly some of the 15% the stock price has fallen the past two days, plus a nice, growing, dividend.

Monday, August 13, 2012


Friday I pitched an old friend, Smart Balance [SMBL], as I believed it had risen too far, too fast. I enjoyed the ride, but the stock had moved from about $5 to $11.50 in a little over two months. It rode on the back of momentum and hope, not earnings or sales growth. Two acquisitions of gluten-free products vaulted the company into the orbit of organic foods and the race was on.

But the basic spreads business has been stagnating and the milk business has not really taken off and depends on heavy couponing. The move into gluten-free is a change of game plan. Additionally, they will be facing higher input costs going forward and they already sell high priced products. So I became nervous and satisfied at the same time which meant sell.

My sell decision often means that a buy order is appropriate for others as stocks continue to rise longer than they should. Also, Steve Hughes will sell SMBL at sometime and I could be really disappointed that I missed the deal, but for now I'm content on the sidelines.

Where did the proceeds go? Some went into PFXF, a new ETF that owns preferred stocks of "non-financial" companies that has a good yield. It really does own financial companies, just not banks, as it has some REITS and insurance companies. Some more went into another old friend that I had divorced a year or so ago, Neutral Tandem, IQNT. It has become obvious, at least to me, that they are setting the stage to be acquired. Several months ago they hired an advisor and recently announced that they will be making a special dividend of about $5 in the Fall and buying back stock. Their returns will look better with a lot of the cash gone and they sound confident that they will have enough cashflow to fund ongoing capex. The earnings shouldn't be under any additional pressure the ROE and cashflow/EV returns will be more attractive. Even though the price will decrease with the dividend, I will at least have some money back and hopefully the company will have found a suitor.

Time to sign off as I'm becoming increasingly interested in a beaver that is sitting in a tree in my backyard. I'm pretty sure it is a beaver but I didn't know they climbed trees and eat leaves. This one is stripping limbs and chomping on leaves and is fat. Since it is hard to type and peer through binoculars, I'm going to stop typing.

Monday, July 2, 2012


Like most investors, I've spent the last several months vacillating between euphoria and despair. A self proclaimed smart investor descends into stupidity. Over and over again.

Of late, I've been encouraged by the performance of a couple of my holdings. Proof that a value investment approach can work over time. Markets will dive and confidence will sag, but some stocks will go up. I'm not discounting luck as a reason.

My last two posts, Smart Balance [SMBL] and Constellation Brands [STZ] are the holdings that have helped hold my net worth together during the market's flight away from commodities, Europe exposure, and other out of favor sectors. Since the first part of April, SMBL is up more than 70% and STZ has risen  over 45%. Both of these companies have good management and operating performance has been OK, but acquisitions have enlivened analysts and investors.

Mario Gabelli jumped on board Smart Balance and bought 5% of the company. He, and others, liked SMBL's acquisition of two gluten free product companies. The party at STZ didn't start when they owned Robert Modavi and a host of wine and spirit names plus 1/2 of Mexico's Modelo American distribution. But it sure started when they announced the purchase of the other half of Modelo's U.S. distribution. The financing is in place, but the final capital structure of the $1.5 billion deal isn't known. I'm sticking with SMBL longer term and may bail after awhile on STZ.

Now the whiff. I've written about Teva before stating that it is under valued and should produce good returns. When? It continues to act like a dead worm in the swimming pool out back; it just keeps sinking. I'm hopeful it has hit bottom and is resting at its low point. The same mindset that hated SMBL and STZ is at play with TEVA. It's hated for patent expirations, litigation, and who knows what else. Those concerns a overblown. Analysts are calling for $5.40 eps in 2012 and $5.80 in 2013. As a $39 stock the P/E is about 7X. Even as a "slow grower" it's worth more than 7X as the balance sheet is decent.

It's only a matter of time with TEVA and you get a 2% yield while waiting. Something will spark the investing community, maybe an acquisition like the other two companies or some break through drug or blockbuster generic opportunity, but it will happen and the upside is significant. I've been saying that for quite awhile, but I remain a believer.

Monday, April 23, 2012

Karate Kid Investing

I don't understand rapid fire trading, either by machines or humans. It's far from investing and only becomes, possibly, meaningful if you add lots of leverage. In terms of purchasing power, backing out inflation and new capital raising, I'm not sure much money has ever been made with this approach. But it can sure swing the markets and garners lots of press.

Mr. Miyagi's advise to the Karate Kid was "wax on, wax off". Today's hedge fund gurus practice the martial arts of "risk on, risk off". "Wax on, wax off" practice helped the Kid, but investing/trading shouldn't be practice, make believe, or foolish. It needs to be serious, since it involves other peoples' money. How does "risk on, risk off" grow wealth? Making a correct, big macro bet will make a person feel prosperous, but the next big, macro bet is likely to go the opposite direction and drive one to the ledge. Taking small amounts on and off the table in "risk on, risk off" maneuvers, only increases transaction costs. How does fleeing to Treasuries, only to return shortly benefit wealth creation?

How do you survive mentally in an investing world dominated by children with machines? Keep enough cash on hand to live, stay invested, and dabble around the edges with options. Pay very little attention to daily market movement.
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