Investor Essentials Daily

With Steel on the Rebound, Look to this Well-Positioned Name

Cleveland-Cliffs Inc. (CLF)
August 23, 2022

SaaS and asset-light models have been overinvested in during the past few years. Spending is shifting elsewhere as investors realize these businesses aren’t a guaranteed return anymore and weak supply chains show where new spending will pay larger dividends.

Capital expenditures, or investment in assets like plant, property, and equipment, are where today’s spending is going rather than asset light models. So, companies that are increasing their capex are positioned well for this.

Cleveland Cliffs (CLF) is a steel company that is doing just that. Their low P/E ratio combined with strong Uniform returns makes it a great FA Alpha 50 name.

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We’re seeing valuations fall in many industries. Investors are realizing that asset-light businesses aren’t a surefire way to high returns

Simultaneously, a trend in capex spending is emerging. Investors are realizing that their dollars could be going to plug a need in the economy today that promises larger returns than the next SaaS name.

Thanks to the pandemic revealing the weakness in “just in time” supply chains, firms are looking to figure out how to compensate. Furthermore, geopolitical tension from the fallout of Russia’s invasion has meant that supply chains in the energy sector have to be completely shifted.

As spending shifts, companies are reinvesting in this building demand. Whether this is new acquisitions, better equipment, or more land. Companies are beefing up their balance sheets like never before.

With this trend comes the logical progression to move away from SaaS models to companies with two things: assets and demand.

One company that services all of these trends is Cleveland Cliffs (CLF).

It’s the largest flat-rolled steel producer in North America. They specialize in mining and steelmaking.

Cleveland-Cliffs anticipates steel demand to rebound by the end of 2022 despite inflationary pressures that have hit the industry recently.

It would be perfectly positioned for this rebound, but many might not realize this based on as-reported Return on Assets (ROA).

ROA on an as-reported basis has fluctuated between 8% and 15%, stuck around the corporate average. Furthermore, the pandemic appears to have completely wiped out the returns in the business.

But, a more robust return emerges when Uniform Accounting is used to scrub the financials and remove any distortions affecting Cleveland Cliff’s financials.

2018’s ROA is 27%, not the 13% as-reported metric Wall Street might have you believe. Just this past year Cleveland Cliff also notched a 26% return, showing a stronger recovery from the pandemic than as-reported shows.

With a low 10x P/E, accelerating asset growth, and strong returns, it is perfectly positioned as a strong name for the impending steel rebound. All this makes Cleveland Cliffs a great FA Alpha 50 name.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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