Motley Fool: Cliffs Natural Resources will reward patient investors

Few people seeking exciting stocks will think of iron-ore and coal miner Cliffs Natural Resources (NYSE: CLF), but they should. Cliffs is the largest producer of iron-ore pellets in North America.

It’s true that coal’s future isn’t burning as brightly as it used to, given environmental concerns and the rise of alternative energy sources. But most of Cliffs’ coal mines produce metallurgical coal, used in making steel, and not thermal coal, used to produce electricity. Demand for steel should be with us for a long time and should grow as our global economy gets back on its feet.

Boding well for Cliffs is China’s recent plans to spend $280 billion on infrastructure.

A global recovery might take a while, as some steel companies are shutting down plants due to weak demand from markets such as Europe. For patient investors, though, Cliffs Natural Resources offers a lovely reward – a dividend that recently yielded 6.4 percent. Better still, it has been hiking that dividend considerably in recent years.

There are risks, of course, such as the company’s rising debt levels and the chance of a prolonged global economic slump.

Cliffs’ stock also appears considerably undervalued, recently trading with a price-to-earnings (P/E) ratio of 4, which is far below its five-year average of 14. Cliffs appears to be a bargain of a stock that’s not being fully appreciated by the market.

Ask the Fool

Q: What’s a mutual fund’s “NAV”? - H.T., Topeka, Kan.

A: The letters stand for “net asset value,” which is the per-share value of a mutual fund.

Mutual fund prices don’t fluctuate during the day as stock prices do. Since funds are composed of many different securities, fund companies wait until the end of trading each day, and then add up the current market value of all their holdings. They then subtract the fund’s expenses for the day, such as commissions paid. The result is divided by the number of shares of the fund that exist. Voila - the NAV.

It’s best not to evaluate a fund’s performance via its NAV, though, as funds will separately pay out income (such as dividends) and realized capital gains to shareholders. Focus instead on a fund’s “total return.”

Q: Are stocks or savings bonds better for kids? - S.R., Pensacola, Fla.

A: The stock market is best for long-term investments of at least five, if not more, years. If it’s short-term money needed in a few years for college, then “safer,” less volatile investments such as savings bonds or CDs can give you a modest return and minimize losses.

For long-term money, though, consider stocks, which have outperformed bonds and CDs over most long periods. An index fund is a great way to start with stocks. You might also invest at least a little money in the stock of a few companies that your children know, such as McDonald’s or Hasbro. Then you can follow the fortunes of the companies together, as they learn about the stock market. (The Motley Fool owns both stocks, and its newsletters have recommended them.)

Learn more at savingsbonds.com, indexfunds.com, bankrate.com and fool.com/mutualfunds/ mutualfunds.htm.

My dumbest investment

I bought 20,000 shares of a certain stock when it cost $0.02 or less per share, and things did not go well. OK, so I didn’t lose much, but that’s still a few hundred dollars that would have been better invested in some other stocks. The company’s technology, converting biowaste into industrial products, was very interesting, but the company just seemed to disappear.

I also bought into another penny stock, but after reading articles at Fool.com and elsewhere that recommended staying away from penny stocks, I sold – and netted a tidy profit. Less than an hour after I sold, the bottom dropped out! Boy, did I get lucky on that one. I felt sorry for the people who bought my shares. – Dave, online

The Fool responds: Penny stocks are indeed dangerous. They can lure you with exciting technologies or cures for cancer, but they typically haven’t turned their potential into profits yet, and that often never happens. They’re easily manipulated and volatile, too, as you witnessed.

You’re right that it’s best to park your money in more proven stocks that can grow with less risk.