I have always been amazed by how fast can market perception change. One day, traders and investors wonder how low a certain stock can go, but soon the same market participants eagerly discuss the upside potential of the very same stock. This is what happened to Cliffs Natural Resources (CLF) recently, which has been out of investors’ favor since March and has only recently started its upside movement. This summer, Cliffs’ stock traded as low as $5.56 per share, while it now trades above $7.50, an upside of 35%. While some investors will attribute the recent upside to expectations of favorable regulatory changes, I continue to believe that the real driver behind the recent strength in the company’s shares are solid fundamentals.
The Chinese second-quarter GDP growth number came in above expectations at 6.9%, strengthening the bull case for iron ore prices, which remain in a rebound mode. Iron ore futures are back into the $55-$65 range that is my base case expectation for this year. With China GDP numbers not falling through the floor, I see no reason for another leg down and a retest of the $50 level for iron ore prices.
This is good news for major iron ore miners Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RIO), and this rally is already providing major support for their shares. BHP showed the most spectacular run, rising from $34 to almost $40 in a straight line. However, speaking about additional upside potential, Vale looks more interesting — especially given the recent political developments in Brazil. I have previously noted that the corruption scandal in Brazil provided a buying opportunity in Vale’s shares. I maintain my view that the stock does not have any political headwinds, and political-related dips will present an opportunity in the future should they occur.
As always on the iron ore market, the big question is if Vale, BHP and Rio Tinto are able to maintain supply discipline in light of upside in iron ore prices. My…