Reddit group WallStreetBets has built its name by successfully targeting several Wall Street hedge funds and fund managers. The short squeeze that the group triggered in GameStop stock nearly triggered a collapse of Melvin Capital. Cleveland-Cliffs (CLF) and Clean Energy Fuels (CLNE) are among the popular Reddit stocks. Which is the best Reddit stock to buy now?
While many Wall Street “pros” might scoff at Reddit traders, the fact is that they have been instrumental in balancing the markets, which have been dominated by institutional investors. Acting as a cohort, retail traders on Reddit have taken some stocks to astronomical highs. Some of the stocks were overlooked by Wall Street before WallStreetBets took over the baton.
Best Reddit stock to buy now
Some of the Reddit stocks trade at levels where it isn't possible to justify the valuations. AMC Entertainment (AMC) and GameStop (GME) are the typical meme stocks where Wall Street doesn't see much value. However, Reddit traders literally drove them to the moon.
We’ve seen a phenomenon where these meme stocks have raised capital by selling shares in a frenzy. Both AMC and GME are typical meme stocks and don’t have a margin of safety. However, that doesn't mean that all meme stocks are fundamentally weak companies trading at exorbitant valuations.
Currently, CLNE and CLF are two Reddit names that are fundamentally strong companies. They were somewhat overlooked by Wall Street. While CLNE is the largest RNG (renewable natural gas) supplier to the North American transportation industry, CLF is an integrated iron and steel producer.
Buying CLNE stock versus CLF stock
CLNE and CLF are in diverse industries and their stocks have been rising for different reasons. For CLNE, the global pivot towards renewable energy is fueling bullish sentiments. In 2020, there was a strong rally in green energy stocks across the spectrum. However, there has been a sell-off over the last few months. Markets got apprehensive about the soaring valuations.
CLF is a story built around near-record high steel and iron ore prices. Things haven’t been this rosy for the U.S. steel industry in a long long time. Nucor, which is the largest steel company in North America, posted record profits in the first quarter of 2021 amid the sharp increase in steel prices.
The Section 232 tariffs that the Trump administration imposed in 2019 are also helping the U.S. steel industry. While there are lingering concerns that the Biden administration might tone down the tariffs, at least on the “friendly” countries, that won’t take away the fact that we are in a commodity bull run globally.
Why CLF looks like the best Reddit stock to buy
While both CLNE and CLF look like good stocks, CLF looks like the better stock out of the two. There are several bullish drivers for CLF stock. There are the infrastructure investments that the Biden administration is proposing, strong demand from the automotive sector, CLF’s exposure to high-end steel products, and the ramp-up of the HBI (hot-briquetted iron) facility.
Cleveland-Cliffs CEO Lourenco Goncalves is another USP for the company. He has transformed the company and placed it on a strong platform. Cleveland-Cliffs is well placed to capitalize on the steel industry’s supercycle.
From a valuation perspective, CLF trades at an NTM EV-to-EBITDA multiple of 3.89x, which is similar to that of U.S. Steel Corporation (X). However, the multiple is a steep discount compared to Nucor’s 6.5x.
Traditionally, Nucor has traded at a premium to other steel companies. However, CLF should attract better valuation multiples than U.S. Steel Corporation based on its stronger management team, better product mix, and growth outlook. If you're looking at a fundamentally strong Reddit stock with a strong growth outlook and some margin of safety, CLF stock will fit the bill.