Short Candidates for Contrarians: Cliffs Natural Resources Inc (CLF), Chipotle Mexican Grill, Inc. (CMG)

Page 1 of 2

“You can’t short anything in this market because of the amount of money-printing.”

Fred Hickey, editor of the High-Tech Strategist, made this remark last week to Barron’s as part of its 2013 roundtable. If you agree with Hickey, you need not read any further.

But some contrarians insist today’s happy consensus that the market can only go higher is exactly the sort of sentiment indicator that generally precedes a market correction, if not a period of stagnation that allows economic conditions to catch up to market exuberance.

So let’s say you want to hedge your portfolio but you’re not an options player and you’re not particularly interested in shorting some of the world’s biggest and best companies, which is what you end up doing with exchange-traded funds that purport to deliver the inverse of the major indexes, such as ProShares Short S&P500 (NYSEARCA:SH) and ProShares Short QQQ. These funds also have compounding issues that make them ill-suited for long-term holds.

Cliffs Natural Resources Inc (NYSE:CLF)AdvisorShares Trust (NYSEARCA:HDGE) attempts to circumvent these problems by actively managing a portfolio of short positions on equities chosen for low quality of earnings or other metrics particular to those companies. This is the first in a series of posts that will look at some of the firms HDGE is currently shorting.

At the end of January, HDGE’s largest short position, accounting for slightly more than 5 percent of the fund, was Cliffs Natural Resources Inc (NYSE:CLF), a major producer of iron ore headquartered in Cleveland that operates mines in the U.S., Canada and Australia. Short interest in Cliffs as a percentage of the float was a whopping 17.8 percent in mid-January, with 25 million of 141 million shares sold short, according to Yahoo! Finance.

Although this looks like a bet against a robust economic recovery, particularly in Europe and Asia, where weak demand for steel has cut iron prices globally, HDGE co-manager John Del Vecchio focuses on quality of earnings in selecting his short positions.

“I’m a forensic accountant by trade, so I find publicly-traded companies where management is aggressive in the accounting and they’re using that accounting to mask a deterioration in their business,” Del Vecchio says. “We short those companies on the expectation that they’ll miss earnings or reduce guidance.”

Cliffs has seen its share price cut in half over the last 12 months. It has enjoyed a mild recovery since the lows of last fall, when it reported third-quarter earnings of $85 million, a drop of more than 80 percent from the $601 million it reported in the year-earlier period. Sales were also down as higher costs and lower prices squeezed many commodity producers. At the height of the boom, more than four years ago, Cliffs traded at $110 per stub.

Fourth quarter earnings, scheduled to be reported Feb. 13, will be impacted by a $1 billion write-down of goodwill related to a 2011 acquisition. This is the sort of balance sheet retrenchment Del Vecchio looks for.

Some analysts think the worst is over. Based on an expectation of higher iron ore prices, Bank of America/Merrill Lynch increased its price target on CLF to $39 in January, and Deutsche Bank upgraded the shares from hold to buy, with a target of $48.

With a trailing price/earnings ratio of about 6 and a 6.7 percent dividend yield (the company jacked up its quarterly payout 123 percent last spring, from $0.28 to $0.625 per share), Cliffs looks cheap, although analysts estimate a forward P/E around 12 amid a cloudy outlook for the price of steel.

With its continuing short position, HDGE is betting that Cliffs has farther to fall. This might be a macro bet on steel demand, but based on Del Vecchio’s specialty, it is more likely a judgment on the company’s earnings quality.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!