Is Cliffs Natural Resources Great or What?

For every stock out there screaming, "buy me," others simply give us a nudge and a nod. While all the attention might be focused on their five-star peers, we can sift through Motley Fool CAPS to find four-star stocks giving us the "high sign" that they're approaching greatness. 

These opportunities -- including familiar names and beaten-down companies -- rank higher than most of the other 5,400 starred companies, and it pays to investigate their potential. This time out we'll take a look at iron ore and coal miner Cliffs Natural Resources (NYSE: CLF), a less obvious source for tomorrow's great buys.

Cliffs Natural Resources Snapshot

Of course, just because the 180,000-member CAPS community has chosen this stock as one being on the road to greatness doesn't mean you should buy in, too. Due diligence is still required, but let's see why they think it might merit your attention.

In the sight of greatness
Investing in the coal industry these days certainly requires a level of contrarianism. Coal prices have fallen as well, particularly for thermal coal, but new air-pollutant regulations from the EPA are encouraging utilities to convert from coal to natural gas, so there's little incentive for them to build coal-fired plants. And with natural gas also at its cheapest level in decades, there's little incentive for utilities to stay with coal.

The onslaught of trends has crushed the valuations of coal miners. Shares of Arch Coal (NYSE: ACI) have lost more than three-quarters of their value while Alpha Natural Resources (NYSE: ANR) is down 85% over the past 12 months. In comparison, Cliffs has lost "only" half of what it traded at last year. Patriot Coal, of course, just declared bankruptcy.

But of course, coal is only half the story (actually, it's just 8% of the story), which is why the stock is such an interesting play. Cliffs is also the largest producer of iron ore pellets in North America. Along with five met coal mines and one thermal coal mine (after it sells another a previously committed thermal coal mine in Australia), it also operates five iron ore mines in Michigan and Minnesota and two more in Canada that provide iron ore for the Asia-Pacific region. It also has an interest in an iron ore mine in Brazil.

Despite a weak economy here at home, revenues for Cliffs rose 7% in the first quarter as higher volumes led to increased production. What hurt profits, which came in lower than last year, were falling prices compared with those enjoyed in 2011. Demand for steelmaking raw materials stayed strong.

The current condition of the world economy, though, including the European sovereign-debt crisis, may affect Cliffs' results going forward if they deteriorate much more. ArcelorMittal (NYSE: MT) says there's a "severe imbalance" between supply and demand in Europe, and it may close more steel plants there. U.S. Steel (NYSE: X) noted that while its own first-quarter results improved, the continent was a wild card and remained challenging.

At less than five times earnings Cliffs trades at lower values than any of its iron ore competitors (coal stocks just aren't profitable these days), which when compared with its projected growth rate makes it a steel -- er, steal. But with its enterprise value going for just 12 times its free cash flow, I think Cliffs is a bargain-basement stock that's not being fully appreciated by the market.

CAPS member MarkP28665 concurs with the discount it's offering, but adds that "at under 5x earnings and a nice dividend I intend to sit on this until the demand for steel improves which in turn would raise the demand for [Cliffs'] iron ore and coke."

With more than 1,500 other members weighing in, it's probably why 96% of them think it will outperform the broad market indexes. Let me know in the comments box below if you think it can dig down to recover, and then head over to the Cliffs Natural Resources CAPS page and weigh in on its prospects yourself.

A great opportunity for you
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