Hook & thesis
Shares of Cleveland-Cliffs (CLF) have retraced from 2025 highs and are trading near $12.00 after a run of volatile quarters and some headline-driven legal noise. That pullback looks like an overreaction. The business is cyclical, capital-intensive and levered to commodity spreads - yes - but CLF's scale, vertical integration (iron ore pellets to finished flat-rolled steel) and exposure to the North American automotive recovery give the company a path back to profitable prints. Buy the dip with a strict stop: this is a tactical, risk-controlled long.
In short: the market is punishing near-term earnings noise and investigations, but the capital structure and underlying inventory give the company time to cycle back into cash generation. For disciplined traders who size positions and use a stop, CLF looks like a favorable risk-reward setup for a 3-6 month swing.
What the company does - and why it matters
Cleveland-Cliffs is a North American flat-rolled steel producer and iron ore pellet manufacturer. It operates end-to-end from mined raw materials, direct reduced iron and ferrous scrap to primary steelmaking and downstream finishing, stamping, tooling and tubular products. The company is a large supplier to the North American automotive industry - a sector that, while cyclical, benefits from onshoring and electrification-related steel content increases.
For investors, the key fundamental driver is the spread between steel selling prices and raw material costs. CLF's vertical integration gives it better control of that spread than many competitors, but integration only cushions volatility; it does not eliminate it. When spreads recover, CLF's fixed-cost base and large asset footprint can generate outsized free cash flow.
Recent financial picture - use the numbers
Look at the most recent quarter (fiscal Q3 ended 09/30/2025):
- Revenues: $4.734 billion for Q3 2025.
- Gross profit: negative $46 million; cost of revenue exceeded sales in the quarter.
- Operating loss: $204 million in Q3 2025.
- Net income (loss): negative $234 million; diluted EPS -$0.51 on ~495 million diluted shares.
- Operating cash flow: negative $143 million in Q3 2025 (net cash flow from operating activities).
- Balance sheet scale: assets $20.29 billion, liabilities $14.583 billion, long-term debt $8.039 billion, equity attributable to parent $5.466 billion.
Those headline losses across the first three quarters of fiscal 2025 (Q1/Q2 also showed steep operating losses: Q1 operating loss -$538 million, Q2 operating loss -$498 million) are real and justify caution. But they are largely consistent with a company operating through a cyclical trough in spreads. Importantly, the company still carries significant inventory (inventory reported at $4.683 billion in Q3 2025) and a large asset base - both give CLF operational flexibility during the down-cycle.
Valuation framing
The market snapshot shows a recent trade at $11.96 (last trade), with a prior close near $12.04 and intraday moves around the low-$12s (snapshot time: 01/08/2026). The dataset does not include market capitalization, so I cannot provide a live market-cap figure here; that said, the stock has moved in a wide band over the past 18 months - from lows under $6 in 2024 to peaks near $16 in 2025 - reflecting the cyclical swing.
Valuation needs to be cyclical: trading at ~low teens per share while the company posts sequential negative margins leaves downside if the steel cycle collapses, but it also leaves upside if spreads normalize. Given the long-term fixed assets and vertical integration, a return to mid-cycle gross margins would compress the implicit EV/EBITDA materially in CLF's favor. Peer comps in the dataset are not helpful (peers list contains many unrelated tickers), so consider this a relative-to-history and relative-to-cycle valuation: the current price is closer to trough multiples than to peak multiples, implying a favorable risk-reward for tactical buyers willing to accept execution and cyclical risk.
Trade idea - actionable plan
Thesis: buy the headline-driven pullback and hold for cyclical recovery or headline resolution. This is a swing trade (3-6 months) sized for risk.
Entry: 11.50 - 12.50 (aggressive buyers can scale in; current quote ~11.96)
Stop: 9.50 (hard stop to limit downside on a structural deterioration scenario)
Target 1 (near-term): 14.50 (reflects recovery toward recent trading highs and improved margins)
Target 2 (upside): 16.50 (near prior multi-month high; trade management and partial sells at each level)
Time horizon: 3 - 6 months
Risk sizing: 1-3% of portfolio on initial position; add only into proven stabilization/catalyst outcomes
Why this structure? The stop at $9.50 sits below recent technical support observed in the past year and provides a clear risk boundary relative to inventory and leverage exposure. The two targets let you book a partial gain at a conservative bounce (Target 1) while letting a runner capture a re-rating back toward peak levels (Target 2).
Catalysts that would drive the trade
- Improving steel spreads as raw material costs decline or selling prices firm - any sign gross profit turns positive again.
- Positive delivery/volume trends out of the North American automotive sector or new OEM contracts that increase flat-rolled demand.
- Resolution or clarification around legal/investigative headlines - the dataset records investor law-firm activity and media coverage in July 2025 which likely pressured sentiment.
- Better-than-feared quarterly operating cash flow and a reduction in working capital headwinds.
- Debt refinancing / balance-sheet actions that reduce rollover risk on the ~$8.0 billion of long-term debt (or a credible plan to de-lever via asset sales or free cash flow).
Risks and counterarguments
This is not a low-risk trade. Key risks include:
- Prolonged commodity weakness: If steel prices and spreads do not recover, losses could continue. Q1-Q3 2025 operating losses (each negative) are evidence of how quickly margins can swing.
- High leverage: Long-term debt of ~$8.039 billion (Q3 2025) is material. If cash flow remains negative or markets tighten, refinancing risk or covenant pressure could become acute.
- Headline/legal risk: The company has had media/legal attention in mid-2025; litigation or regulatory action could impose settlements or remediation charges and keep sentiment depressed.
- Execution risk with inventory: Inventory is high (~$4.683 billion Q3 2025). If demand collapses, carrying costs and markdowns could force additional write-downs and margin hits.
- Cyclical demand shock: Automotive or broader manufacturing weakness from recession, tariffs, or trade policy shifts could depress demand for months.
Counterargument to our bullish trade: One could argue the market is pricing in a structural reset – namely, a prolonged period of lower steel demand, rising raw material inputs, and legal/regulatory costs that would permanently impair returns on capital for large integrated producers. If CLF cannot return to positive gross profit within the next 2-3 quarters or if the legal matters escalate into material, multi-quarter charges, the stock could trade well below our stop.
What would change my mind
I will reassess this position if any of the following occur:
- Operating cash flow remains negative for two consecutive additional quarters and working capital drains cash without signs of reversal.
- Long-term debt increases materially above the ~$8.0 billion level without credible deleveraging plans or visible refinancing terms.
- Material legal settlements or regulatory fines are disclosed that change net income and free cash flow assumptions.
- Automotive demand suffers a clear structural decline, not a cyclical one, as evidenced by multiple OEM cuts to orders and published guidance showing durable end-market weakening.
Execution notes & final take
This is a tactical trade on a cyclical, levered steel operator. The dataset shows significant recent operating losses and negative operating cash flow in the latest quarter, so this is not a buy for the faint of heart. That said, CLF's scale, vertical integration and inventory footprint give it operational breathing room if the steel cycle normalizes. The current price near $12 represents a compromise: headline risk is priced in, but fundamental recovery remains possible.
Trade with a strict stop at $9.50, scale into 11.50-12.50, take partial profits at $14.50 and let a runner chase toward $16.50. Keep position size limited and monitor operating cash flow, legal developments and steel spreads closely. If those signals turn decisively negative, cut the position and move on - this thesis is explicitly risk-managed.
Disclosure: This is a trade idea, not investment advice. Size positions according to your risk tolerance and use the stop and targets above to manage risk.
Author: Hana Yamamoto, Consumer Staples Analyst at TradeIQAI (writing on industrial cycle exposure and company fundamentals).