Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Cliffs Natural Resources, Inc. (CLF Quick QuoteCLF - Free Report) stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Cliffs Natural has a trailing twelve months PE ratio of 19.62. This level compares favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.34.

If we focus on the long-term trend of the stock the current level puts Cliffs Natural’s current PE among its highs over the observed period. Nevertheless, it is an improvement over the trend of negative earnings witnessed in 2016, where the PE ratio was in negative territory.

Further, the stock’s PE compares slightly unfavorably with Zacks classified Basic Materials sector’s trailing twelve months PE ratio, which stands at 17.59. At the very least, this indicates that the stock is slightly overvalued right now, compared to its peers.

We should also point out that Cliffs Natural has a forward PE ratio (price relative to this year’s earnings) of just 6.28 – considerably lower than the current level. So it is fair to say that a significantly more value-oriented path may be ahead for Cliffs Natural stock in the near term. The drastic difference between the trailing twelve months PE ration and forward PE ratio is the result of Cliffs Natural’s seemingly volatile earnings trajectory.

PS Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Cliffs Natural has a P/S ratio of about 0.78. This is considerably lower than the Zacks categorized Basic Materials sector average, which comes in at 2.55 right now. Notably, Cliffs Natural has always traded cheaper in comparison to its peers, from a P/S ratio perspective.

However, CLF is actually towards the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, Cliffs Natural currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Cliffs Natural a solid choice for value investors.

What About the Stock Overall?

Though Cliffs Natural might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘F’. This gives CLF a Zacks VGM score—or its overarching fundamental grade—of ‘C’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s earnings estimates have been trending downwards lately. The current quarter has seen no estimate go higher in the past sixty days compared to two lower, while the current year estimate has seen no upward revisions and two downward revisions in the same time period.

This has had a meaningful impact on the consensus estimate, as the current quarter consensus estimate has declined 41.7% in the past two months, while the current year estimate has decreased by 30.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Cliffs Natural Resources Inc. Price and Consensus

This bearish trend is why the stock has a Zacks Rank #5 (Strong Sell) despite somewhat strong value metrics and why we fear that the company might disappoint in the near term.

Bottom Line

Cliffs Natural is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front.

The company forms a part of the Zacks classified Mining – Iron industry which has a sluggish industry rank (among the Bottom 8% out of more than 250 industries). Cliffs Natural is thus faced with a challenging operating environment. The current uncertain macroeconomic environment, including slowdown in Europe, is impacting the company’s operations. Moreover, demand for raw materials used in steel production is mostly driven by rapid industrial growth in China. Demand for iron ore is somewhat soft in China given the sluggishness in the country’s economy. In fact, the company has reduced its profit outlook for 2017 too due to lower expected iron ore prices.

Notably, over the past three years the Zacks categorized Mining – Iron industry has clearly underperformed the broader market, as you can see below:

Nevertheless, Cliffs Natural remains focused on de-leveraging its balance sheet and improving its cost structure. The company is also focused on cash management, including optimum utilization of cash in capital allocation plans. Commitment to increasing shareholder returns through dividends and share buybacks also bode well for investors. Moreover, Cliffs Natural is expected to gain from ArcelorMittal and U.S. Steel Canada deals and an expected rise in steel demand in the U.S.

So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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