Insiders are Pounding the Table for Cleveland Cliffs

Cleveland Cliffs (CLF) has been a winner in 2021, returning 44% YTD and posting a gain of almost 70% over the past year. Shares of the vertically-integrated steelmaker have cooled off with the general market and are down 7% over the past month, as well as 23.6% from their 52-week high. The recent pullback seems to be a result of investor concern about the omicron variant slowing down demand for steel. Additionally, the semiconductor shortage has slowed down production in Cleveland Cliff’s largest end market, autos. 

Even after this impressive run over the past year plus, shares of the $10 billion steelmaker still look very cheap on a variety of metrics, and CEO Laurenco Goncalves is brushing off the short-term headwinds and pounding the table for the stock, buying nearly $1 million worth of shares on December 1st. Like Goncalves, I am constructive on the stock and think it is a great buying opportunity at current levels. 

Insider Buying 

The outspoken Goncalves bought 50,000 shares of CLF on the open market on December 1st, at an average price of $19.76. Goncalves, who presumably knows his company better than anyone, feels bullish enough about it to buy almost $1 million worth of new shares, in addition to the more than $92 million worth of shares that he already owned. 

Furthermore, CFO Celso Goncalves Jr., who is Laurenco’s son, bought 10,000 shares between November 29th and 30th for an average price of $20.65. Keith Koci, the executive vice president and longtime CFO who served in the role before Celso, also bought 10,000 shares on the open market on November 19th for an average price of $21.83. 

As the old investing adage says, there are many reasons for insiders to sell shares, but only one reason for buying. Clearly management is pounding the table for the stock and appears to be united in its belief that shares are a bargain at these levels. 

Valuation 

Shares of Cleveland Cliffs are super cheap. Even after the stock’s impressive performance in 2021, it only trades at a P/E of just over 5.2 and a forward P/E of 3.7. The company also trades at a price to sales ratio of well below 1. A PEG ratio of just 0.2 is also enticing. 

In a market environment where long duration investments like tech companies with little to no current profits are seeing their multiples contract drastically, Cleveland Cliffs trading at these undemanding multiples seems like a sound defensive play.  

Analyst Sentiment  

Goncalves isn’t the only one who seems to think Cleveland Cliffs is undervalued – the average Cleveland Cliffs price target is $29.26, representing about 45% upside from today’s prices. Collectively, the six analysts covering the stock view it as a Moderate Buy, with four Buy ratings and two Hold ratings. The highest analyst price target, $37, represents a cool 85% upside from today’s levels. Even the lowest analyst price target of $23.50 is above today’s price, indicating that downside from here could be limited. 

Takeaway

After a big year, Cleveland Cliffs has pulled back a bit as investors and analysts worry that the new COVID variant and continued supply chain bottlenecks in the auto industry will hurt steel demand in the short term. But these headwinds are likely temporary, and senior management, led by Goncalves, is all in on the stock, putting their money where their mouth is and buying a considerable number of shares on the open market. This insider confidence that Cleveland Cliffs is undervalued correlates with Wall Street’s view, as analysts see an average of 45% upside from today’s levels. Based on this confluence of factors, I view Cleveland Cliffs as a strong Buy.  

Disclosure: At the time of publication, Michael Byrne owned shares of Vale.