Cliffs Natural Resources
While I'm optimistic about Cliffs as a long-term play, I realize that many investors are pessimistic. Some see the proverbial glass as not only half-empty, but also full of cracks. And laced with arsenic. For those of you in this group, here are two things you must believe to bet against Cliffs over the long run.
1. China won't grow
China accounted for 31% of Cliffs' total 2011 revenue. That's up 4% from 2010. If China's growth stagnates, Cliffs' earnings will almost certainly hit a great wall.
There are reasons for concern. Cliffs' primary Chinese customers are steelmakers, and the steel outlook in China looks grim, according to some analysts. How bad is it? Two large Chinese steel operations have actually expanded into the pig business -- not pig iron, but rather the kind of pigs that oink.
Potential gloomy scenarios for China include a meltdown in property prices. Fortune published an online article earlier this year stating that "a crash on the scale of the real-estate collapse in Japan in the 1990s is a virtual certainty." According to BBC, financial experts estimate that the Chinese economy is more dependent on housing than the U.S. was in 2007.
On the positive side, Chinese premier Wen Jiabao went on record stating that the Chinese government was committed to controlling housing prices. Chinese leaders are also projecting confidence that recent stimulus efforts will propel the economy to a steady recovery in the latter half of 2012. China is targeting annual growth of 7.5% -- slower than in the past but still strong in comparison with most countries.
2. North Americans won't buy many cars
China is big for Cliffs, but North America is even bigger. Sales to customers in Canada and the U.S. make up 54% of total revenue.
One customer accounts for more than a fifth of Cliffs' overall sales. And this customer, ArcelorMittal
A recent study by AlixPartners, a global business-advisory firm, gives some credence to the proposition that car sales will decline. The study found that several factors threaten auto sales growth, including persistent unemployment in the U.S., increasing overhead costs for automakers and their suppliers, and a demographic shift as Millennials place less value on cars than earlier generations.
U.S. automakers aren't encountering any of these problems at this point, though. June sales were strong, with all of the major manufacturers beating same-quarter results from last year. General Motors
Despite these potential issues, I see the glass as half-full. Cliffs looks like one terrific bargain to me for long term investors. The stock trades on a price-to-earnings ratio of 4.1. The price-to-sales ratio is a low 0.94.
In addition to sporting a low valuation, the company pays a dividend currently yielding 5.5%. Future troubles could jeopardize the dividend payout, but Cliffs shouldn't have any problems paying dividends in the near term.
A few of Cliffs' peers look pretty good through my half-full glass, too. BHP Billiton
Maybe doomsday predictions will prevail. China's economy could collapse. Canadians and Americans could quit buying new cars. The Mayan calendar could turn out to be accurate. Cliffs Natural Resources could flop.
If you think that just maybe China will continue to chug along and cars on this side of the Pacific will continue to sell, though, Cliffs might be a stock for you. This assumes, of course, that our Gregorian calendar keeps working fine come December.
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Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of ArcelorMittal. Motley Fool newsletter services have recommended buying shares of General Motors. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.