It’s been a tough year for aluminum. The spot price of so-called “primary aluminum” (99.7% purity) has fallen over -12% year to date, but that’s nothing when compared to the decline in the world’s largest aluminum manufacturer, Alcoa, Inc. (AA). The Dow Jones component’s shares are down over -32% year to date, a decline that’s a clear reflection of fears of another leg downward in the global economy.
But investors should remember the old adage “buy low, sell high” when it comes to Alcoa. AA stock may have had a rough run lately, but there are signs pointing to a turnaround in the company soon. Here are five reasons why investors should consider Alcoa stock for their portfolios.
Alcoa Could Ride a Global rebound. Times have been tough for the global economy. Headlines blaring out about euro zone fiscal chaos, and the potentially adverse affect that will have on export dependent countries such as China have teamed up to create an aversion to global manufacturers such as Alcoa. Economic data from around the world has been mixed thus far in 2010, but there is no real proof of a “double dip” in the works. If things remain soft, that sluggish trend is already baked into AA stock — but if we start to see a decided trend toward improving global economic metrics, it could do wonders for a stock like Alcoa.
Pent-up bullish demand for Stocks. As we’ve seen so far in July, investors are starting to regain their appetites for equities. Alcoa shares actually spiked about +10% from July 2 through July 9, a clear sign that bullish demand has found its way to the aluminum giant in anticipation of its earnings report. If this pent-up demand for quality manufacturing bellwethers continues, look for Alcoa to shares to get a lot more investor love.
Strong 2Q Alcoa Earnings: After the bell yesterday, Alcoa announced it topped earnings forecasts by a penny. That sent shares soaring after hours last night, and up over +4% this morning in premarket trading this morning. Things are brighter looking forward for Alcoa after this earnings report, with the aluminum giant saying resilient demand should prompt a sales increase in the metal of +12% — significantly higher than Alcoa’s previous guidance of a 10% jump.
Smart cost-cutting measures. In order to cope with falling aluminum prices and a tepid global economy, Alcoa CEO Klaus Kleinfeld has undergone a cost-cutting mission. The company has opted to close down production facilities, and it’s also reduced its labor force by some 60,000 employees. The company’s also sold-off a considerable amount of noncore assets. The streamlining of the company says that management is willing to do what’s necessary to keep the company profitable—and that’s nearly always a positive for investors.
Oversold technicals. There’s no denying the drubbing taken in AA since the market began its earnest slide in April. Alcoa shares broke below their 50-day moving average in mid-April, and by early May the shares had fallen through support at the 200-day moving average. The descent was fast and furious after that.
Yet, if you look at the one-year chart above of AA, you’ll see that stock has now bounced well off its 2010 low of $10. This is a clear indication that investors think the shares are cheap at this level, and that the technicals in the stock show it is just way too oversold.
If Alcoa can give the Street a sense that it has prevailed in Q2—and will continue prevailing despite the economic headwinds it faces in 2010—then look for this stock to build on it’s recent run higher.
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