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Why Cleveland-Cliffs Stock Jumped on June 16

By Reuben Gregg Brewer – Jun 16, 2020 at 3:35PM

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It was just a rumor, but the news leak had a very positive impact on Cleveland-Cliffs' share price.

What happened

Shares of integrated steel maker Cleveland-Cliffs (CLF -2.18%) rose nearly 12% in the first half-hour of the trading day on June 16. Although the gains didn't hold, by roughly 3 p.m. EDT, the stock was still higher by around 9%. There was no news here, but there were some notable rumors that left investors feeling upbeat about the company's future.

So what

According to "people familiar with the situation," the White House is working on a $1 trillion infrastructure spending plan. As one of the largest primary steel producers in the U.S. market, Cleveland-Cliffs' steel mills would see extra demand. However, the integrated company is also one of the largest producers of iron ore in North America.

Although it uses the iron ore it produces in its own mills, it also sells this vital steel building block to other mills. Thus, it wouldn't only benefit from increasing end-market demand for its own mills, but also from a potential uptick in demand within its mining operations as other mills see increased demand, too. 

A man standing in front of hot sparking steel

Image source: Getty Images.

Until an announcement is made on this front, however, the $1 trillion in infrastructure spending remains little more than speculation. So the day's gains could easily fall away if nothing comes of the rumor. And as far as it goes, Cleveland-Cliffs' blast furnaces aren't the most efficient steel mills in the country. In fact, the company's current structure was created when the one-time mining-focused company agreed to buy struggling steel maker and major customer AK Steel in late 2019.

At the time, the move looked more like a bailout than a desirable merger. In the end, if there's a big infrastructure-spending plan, Cleveland-Cliffs will be a net beneficiary, but it still might not be the best steel investment for investors to own.

Now what

Investors shouldn't get too excited about Cleveland-Cliffs' stock price advance. Not only is it based on a rumor, it coincides with a broad-based upturn in construction-related names. Effectively, Wall Street is painting a large collection of companies with the same brush.

Long-term investors should be more selective than that. And when it comes to steel mills, there are much better names to consider, including industry giant Nucor and smaller upstart Steel Dynamics

Reuben Gregg Brewer owns shares of Nucor. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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