What happened
Shares of Cleveland-Cliffs (CLF +0.57%), one of North America's largest integrated steel manufacturers, rose by just over 10% in morning trading on Tuesday. As of just after 2 p.m. EDT, the stock was still up by 9.4%. There was no particular news out of the company, but it did receive an updated view from a Wall Street analyst.
So what
An analyst at Credit Suisse Group upgraded Cleveland-Cliffs from neutral to outperform, and raised the price target on the stock from $21 to $24. Traders tend to like it when stocks receive upgrades, so it's not surprising that they bid the shares higher in response. Cleveland-Cliffs' stock closed out Monday's trading session at roughly $18.20 per share, so even after Tuesday's notable gain, there is still material upside in Credit Suisse Group's call.
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Underpinning the analyst's view is a belief that the steel market is in a material up-cycle that has further to go before it's done. Moreover, North American steelmakers, the thinking goes, are particularly well-positioned to benefit given their low costs and high margins. A reduction in imported steel products, notably from China, should also benefit domestic producers.
Now what
Analyst upgrades are exciting news, but investors need to keep them in perspective. Alone, they really don't offer enough of a reason for a long-term investor to make a buy call on a stock. It's also worth noting that Cleveland-Cliffs' production is heavily reliant on blast furnaces that need to run at high utilization rates to be profitable. In up markets, such steel mills can make a great deal of money. However, when utilization falls, profits can transform into losses. Rivals like Nucor and Steel Dynamics, which both use flexible electric arc mini-mills, have proven much more resilient through the entire steel business cycle. For most investors, it would probably be a better option to wait for an industry pullback and then buy these competitors, which are better positioned to thrive regardless of what stage of its cycle the steel industry is in.
