April 5, 2022

Today, I’m adding Cleveland, Ohio-based company Cleveland Cliffs (CLF), the largest flat-rolled steel producer in North America.

Market Overview

Before we dive into this week’s recommendation, it’s time to move on from Corning (GLW) as the stock broke my stop. While I don’t anticipate GLW crashing lower, we need to stick to the plan and exit this trade today.

To execute this trade, you need to:
Sell GLW Stock
Buy to Close the April 39 Calls

Of note, our remaining five April covered call positions are in great shape headed into expiration next Friday.

Moving on …

Last Friday marked the end of the first quarter, and the Q1 results for the indexes weren’t great, as the Dow, S&P 500 and Nasdaq finished lower by 4.2%, 4.6% and 8.8%, respectively. Though of note, even though the S&P experienced its worst-performing quarter since 2020, the losses were minimized as the indexes have rebounded approximately 10% in the past two weeks.

Despite some violent day-to-day swings last week, the three leading indexes were mostly unchanged as the Dow lost 0.1%, the S&P 500 gained 0.1% and the tech-heavy Nasdaq climbed higher by 0.7%.

Today, I’m adding Cleveland, Ohio-based company Cleveland Cliffs (CLF), the largest flat-rolled steel producer in North America.

New Recommendation

The Stock – Cleveland-Cliffs (CLF)
Why the Strength
New coronavirus restrictions in China have created global supply fears for steel, as most of the nation’s mills now face raw material shortages. Additionally, sanctions on Russian pig iron (a key steel ingredient) and suspension of iron exports from Ukraine have forced producers to hike retail steel prices while scrambling to find replacement cargoes.

Cleveland-Cliffs is the largest flat‑rolled steel and iron ore pellet (another key input to steel) maker in North America, thanks in part to a timely purchase of the U.S. assets of steel giant ArcelorMittal in late 2020. Aside from the recent expansion, the firm also invested in its own alternative capacity in the form of a hot-briquette iron (HBI) plant in Ohio in 2020.

HBI is a steel-making substitute for pig iron, so this puts Cliffs in an excellent position to meet rising steel demand related to the shortage of that input. The company had already been basking in the glow of the red-hot steel market when a major Wall Street bank boosted its steel price outlook for the rest of 2022 while naming Cliffs as its top steel sector pick (a reason for the stock’s strength).

In 2021, the company posted records in several key metrics, including cash flow, revenue and EBTIDA. Fourth-quarter revenue soared 137% from a year ago to nearly $5.4 billion on the back of an 82% jump in steel product sales volume. And while per-share earnings of $1.78 missed estimates by 27 cents, it was miles above the year-ago level of 24 cents. Going forward, Cliffs said it would raise prices for several steel products by at least $50 per ton due to new order strength and announced a $1 billion share buyback program.

Analysts see earnings remaining at nosebleed levels through this year (north of $5.50 per share!), and even that outlook could prove conservative.

Technical Analysis
After hitting a peak at 26 last August, CLF spent the next five-and-a-half months grinding lower in response to weakening steel demand related to China’s real estate crisis. Shares bottomed at 16 in late January and turned higher in February, but it was really Russia’s invasion that created an entirely new dynamic for the stocks. CLF has since exploded to levels not seen in over nine years, with the latest upgrade providing an additional boost. We suggest nibbling on dips, though we’re not expecting a major pullback given the numbers and buying power of late. Stop—25

The Covered Call Trade
Buy Cleveland-Cliffs (CLF) Stock at 34, Sell to Open May 33 Strike Calls (exp. 5/20) for $3.00 or a Net Price of 31 or less

Static Return: $200 per covered call (6.45%)

Breakeven: 31

Covered Call Return (if assigned): $200 per covered call (6.45%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 31 or less. (In this case 34 minus 3 = 31. Or another example is you could pay 33 for the stock and sell the 33 call for 2, which also equals 31.)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on April 12, 2022.