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Monday, April 22, 2024

Top Trade Alert – Dec 18, 2023 – Cleveland Cliffs (CLF)

$14.1Bn, that would have made old JP Morgan Happy.

The Founding of U.S. Steel and the Power of Public Opinion | Baker Library  | Bloomberg Center | Harvard Business School

US Steel became America's first Billion-Dollar corporation in 1901, after JP Morgan bought out Andrew Carnegie's steel companies for $492M and then rolled up several other steel companies, including Charles Schwab's steel company as well (this is where all that money came from - 100 year's compound returns on $1Bn!).

$14.1Bn is a 60% premium to Friday's close which what an 80% gain since rumors about a buyout of X began in August so good luck to Japan justifying that purchase! This should also be good for CLF because they WON'T be buying X and most people think they were biting off more than they could chew with their original offer.  

At just $9.4Bn in market cap with almost $1Bn in profits on $21Bn in sales, CLF seems a bit undervalued as X only had $17Bn in sales with the same $1Bn in profits. For our Short-Term Portfolio (STP) I think a fun way to play CLF would be:  

    • Sell 15 CLF 2026 $17 puts for $3 ($4,500)
    • Buy 20 CLF 2026 $15 calls for $7 ($14,000)
    • Sell 20 CLF 2026 $20 calls for $4.60 ($9,200) 

That's net $300 on the $10,000 spread so there's $9,700 (3,230%) of upside potential if X is over $20 in 2 years. If they do get bought, the options will trigger early and that will make us very happy! If they don't get bought, our break-even is $17.03 - 9% below the current price.

It's possible the purchase of X may be blocked as steel is a vital industry for the US but we still like CLF long-term, trading at just 10x earnings - so I don't see a good reason not to make this trade.  


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