Safe-Play for the Stimulus Package

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Whenever an industrial stock takes a beating, Europe is blamed for it, and I too would like to blame Europe for the suffering iron ore prices. For investors who don’t wish to experience the volatility in the prices of iron ore, Cliff Natural Resources (NYSE: CLF) which is a major iron ore producer could be a fair play.

Cliff Natural Resources is a Cleveland based iron ore and coal mining firm that has nearly 4000 employees.  The company with a market cap of $6.49 billion is a significant producer of both high and low level volatility metallurgical Coal. The company directly benefits from rising coal prices, as it is involved in its direct production instead of streaming.

Bottoming out Iron Ore?

Prices of iron ore plunged steadily with concerns over a global slowdown, until recently when China announced the approval of its infrastructure development plan worth around $156 billion. It’s a well-known fact that the Chinese demand affects the prices of commodities across the globe, and this has created chatter throughout the market, as to whether the prices of iron ore have bottomed out or not.

Additionally, the recent round of quantitative easing announced by Ben Bernanke was greeted positively by all the major markets globally. The Federal Reserve Bank would be spending $40 billion every month to buy the risky mortgage debt from the market. This would reduce the toxic debt levels and yet keep interest rates at low levels. Also the Federal Reserve Bank announced that it will be buying $85 billion worth of bonds every month. It was also announced that the interest rates will remain at low levels at least until 2015.

It’s clear that the Federal Bank is trying to inject liquidity in the market at the rate of $125 billion per month, while reducing risky assets from the market. It’s a fact well known that liquidity impacts industrial companies, and the added liquidity is expected to launch a range of infrastructure projects in the US. Any infrastructure development in the country is good for the iron ore prices, and eventually beneficial to Cliff Natural Resources.

The numbers game

Dropping ore prices have been a nightmare for iron ore producers, and the stocks of Cliff
Natural Resources along with its competitors Rio Tinto (NYSE: RIO) and BHP Billiton (NYSE: BHP). But taking a 5 year view of returns, Cliff Resources has outperformed the peers.

 

<img src="/media/images/user_13723/clf_large.JPG" />

Looking at the comparison table of fundamentals, Cliff Resources is the most undervalued stock amongst its peers. The company has the best price-to-sales ratio, along with the highest net profit margin. The stock yields a handsome 5.49% and analysts believe that the EPS growth for the next year would be around a massive 35.15%. This table clears that Cliff Resources is the fundamental pick amongst its peers.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>Net Profit Margin</strong></p> </td> <td> <p><strong>Dividend Yield</strong></p> </td> <td> <p><strong>EPS next yr.</strong></p> </td> </tr> <tr> <td> <p><strong>Cliff Resources</strong></p> </td> <td> <p>4.55x</p> </td> <td> <p>0.97x</p> </td> <td> <p>24.43%</p> </td> <td> <p>5.49%</p> </td> <td> <p>35.15%</p> </td> </tr> <tr> <td> <p><strong>BHP Billiton</strong></p> </td> <td> <p>12.53x</p> </td> <td> <p>2.66x</p> </td> <td> <p>21.50%</p> </td> <td> <p>3.10%</p> </td> <td> <p>-18.55%</p> </td> </tr> <tr> <td> <p><strong>Rio Tinto</strong></p> </td> <td> <p>23.74x</p> </td> <td> <p>1.73x</p> </td> <td> <p>8.45%</p> </td> <td> <p>3.11%</p> </td> <td> <p>18.38%</p> </td> </tr> </tbody> </table>

The Foolish Bottom-line

The added liquidity in the market along with reduced asset risk is expected to kickstart infrastructure projects, which could be a turnaround for iron ore prices, and any reversal in the prices of the industrial commodity is a direct benefit to Cliff Natural Resources. The company has better fundamentals than its peers, and the returns on the stocks are also the highest. I believe the stock is ripe for a surge in price, which gives it a Foolish Buy rating


PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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