Last week, we were greeted with an announcement of yet more government spending. This time, toward “infrastructure.”
The Senate passed a $1 trillion dollar bill with around $550 billion allocated toward roads, bridges, and other infrastructure. We’ll find out soon if it becomes law.
Building those big infrastructure projects will require steel. Lots of it.
As one of the largest steel producers in the country, Cleveland-Cliffs (CLF) stands to benefit.
Congrats if you bought some CLF shares. Since my original recommendation, you’re up around 18%. Nice work!
And while the bill gave CLF a boost, I believe this is just the beginning. The infrastructure bill will likely help Cliffs with greater demand for steel. But remember: The longer-term outlook for CLF is what we’re really playing for.
This is a high-growth company with a monopoly-like hold on US iron ore and flat-rolled steel production. The market still hasn’t caught on yet.
I should also add that, almost immediately after my recommendation, Cliffs put out a huge announcement. They are using their cash to repurchase nearly 10% of outstanding shares. This is CEO Lourenco Goncalves’ way of communicating to the market that five-times earnings for the company is just too cheap.
My price target for Cliffs is still north of $40 per share. Consider buying shares here if you haven’t already.
With that, I’d like to open up the mailbag and answer your questions that have been rolling in. I appreciate all the great feedback that’s come in so far, and you can write me anytime at email@example.com.
We’ll kick things off with a comment about Cliffs…
Thank you for the great write-ups. I think that the bull-case for Cliffs (and the broader steel space) is likely to come through from China's green agenda, as it seeks to curb steel production. This will lead to sustainably less exports, a tighter seaborne market, and a structural increase in margins for European/US producers.
The China angle is something I haven’t touched on but agree entirely with your point. The bulk of China’s steel plants are powered with coal. The US, on the other hand, uses natural gas. This is one of the culprits for all the smog. China apparently produces 2.5x more CO2 per ton of steel produced than the US.
I’ll have more to say on Cliffs in future issues of Smart Money Monday as CEO Lourenco Goncalves continues to execute.
Congratulations to Thompson and the Mauldin team for a great match-up. As a prior subscriber to the Bonner Focus Letter authored by Thompson and Chris Mayer, I am familiar with his strong track record for small caps—and have ridden RILY from $13 to $75 over a few years’ time.
His introductory note about the "Secret Switch" confirmed my confidence to continue holding AYX, SHOP, and WIX—which were already in my portfolio. Recently I responded immediately by adding his recommendation for Cleveland Cliffs to my US small-mid value portfolio. So I look forward to great things to come.
Thanks for the kind words. I’m thrilled to hear you’re still in RILY. I love everything they’re doing over there. It’s not a screaming buy here… but I believe we will get our chance at a “second bite” at the apple eventually…
Nocode, as outlined in my “Secret Switch” article, is a theme I am tracking extremely closely.
Until recently, if a business wanted to build a website, an ecommerce store, or an app, it needed to hire a developer. It was a complex and expensive chore.
NoCode software is rapidly changing that. It’s software that allows people with no coding experience to build software.
This is a game changer.
Gartner expects NoCode companies to bring in nearly $14 billion in revenue next year. That would represent a 23% growth rate over 2021.
The three Nocode companies I’m watching closely are Alteryx (AYX), BigCommerce (BIGC), and UiPath (PATH).
I’m not ready to pull the trigger on any of these three yet. But I’ll update you if anything changes.
Hi, Thompson. What are some key characteristics you look for when researching a potential stock pick?
Over my career, I’ve found that many of my best investments shared a few distinct traits. And one of the first things I look at is the people running the company...
First, you want to make sure management has “skin in the game.” That is, ownership. They’ve got to own stock in their own company. Preferably a lot of it. This is because it aligns their incentives with that of shareholders. Shareholders want to see the value of their shares increase. They don’t want to see management get paid millions in cash and options without having skin in the game.
Second, they need to be investors. A retail clerk who works his way up to CEO (think Walmart or UPS) is likely an excellent operator. He knows how to find employees and get every ounce of productivity out of them. He or she is wired a certain way. These people are critical to running a business. However, great operators don’t always make great investors. We’re looking for folks who can find and attract good operators, but are also very smart with how they invest all the profits generated by the operators.
Third,we need to get in at an attractive price. We did that with Franchise Group (FRG), and it’s still looking cheap today. With Cleveland Cliffs (CLF), we’ve got a mix of an operator and investor. Lourenco Goncalves has spent years operating steel companies. But lately, he’s shown himself to be a shrewd investor. As I told you last week, he’s bought up two of his customers. And we’re buying at an attractive multiple of earnings—somewhere around 5x this years’ earnings. Both companies are still relatively small. This means they have a ton of room to grow—and have a real shot at putting up monster returns for us early investors.
Thanks for valuable insights through Smart Money Monday—appreciate it! What's your take on Synthetic Biology Stocks and/or this Emerging new technology?
I’m sure the sector will produce some winners. However, I’d have to refer you to Chris Wood, our resident biotech expert. He heads up our Biotech Millionaire advisory, which you can learn more about here. Here’s Chris:
Chris Wood: Synthetic biology is arguably the most disruptive technology ever created. In the long run, its applications are practically limitless. New drugs... new diagnostics... new sustainable ways to produce foods, fuels, plastics, and valuable chemicals.
Put simply, synthetic biology involves (re-)designing living things (or parts of living things) so they make or do something useful for us. Humans have been manipulating nature for thousands of years... since the dawn of agriculture. But synthetic biology is on another level. It’s essentially reading, editing, and writing DNA to program living things like a computer. Synthetic biologists can now design new yeasts that turn sugar into renewable fuels, for example.
That’s amazing. But it’s important to remember synthetic biology is still in its infancy. So the stocks in the space tend to be quite volatile. Take Zymergen (ZY), for example. It designs microorganisms to create biomolecules that are the key ingredients in its products, which include a thin flexible film for electronics. Soon after Zymergen went public in late April at $35, it quickly soared to $50, before plummeting 77% in one day after acknowledging some issues with production.
So, while I’m extremely bullish on synthetic biology stocks overall in the decades to
come, be sure to do your homework before investing in the space.
Thompson again. I’m putting together my next Smart Money Monday idea for you. It’s my favorite Canadian stock. Not only is it super cheap at today’s levels… but it has a long, respectable track record. I’ll tell you all about it next week.
As always, thanks for being a Smart Money Monday reader.
Editor, Smart Money Monday