Foiled in 2012, Alcoa Stock Looking Up in '13

At the end of 2011, InvestorPlace launched a feature of the 10 Best Stocks for 2012. My pick was Alcoa (NYSE:AA), in hopes of signs of a recovery in a global manufacturing generally and improvement in aluminum pricing specifically.

Oops.

A year later, the stock is almost exactly where I bought it — and yes, I did buy it personally in my own portfolio, so I have skin in the game here.

So what held Alcoa stock back in 2012?

A manufacturing recovery didn’t happen: Though JPMorgan (NYSE:JPM) posted some nice stats early in 2012 — including January’s seven-month high in global manufacturing PMI — continued troubles in Europe and a China slowdown quickly took the air out of the balloon. Most recently, global PMI contracted for the fifth consecutive month, according to JPM.
Aluminum prices stayed soft: To start the year, aluminum spot prices were just shy of 95 cents a pound. They climbed through March, but then crashed to a low of almost 80 cents at midyear and are now around 90 cents a pound.
Investors remain defensive: On a basic level, it’s hard to get quantitative support for Alcoa stock when it has a meager dividend (just 1.4% at current valuations) and clearly is a cyclical stock. The global economy remains troubled, with the Organization for Economic Cooperation and Development cutting global GDP growth forecasts for 2012 to 2.9% for the full year. It’s hard for cyclicals to gain traction in this environment.

All this is proof that I won’t “win” the 10 Best Stocks for 2012 contest.

But for the record, I am not going to bail out of my Alcoa shares when this year’s edition of the stock picking feature ends in a few weeks. Here’s why:

Many 2011 arguments hold in 2012: The strangest thing about my investment in Alcoa is that I find myself making the same arguments now that I did in December 2011. Global manufacturing could rebound, particularly with China PMI on the mend. Aluminum prices regained the 95-cent mark in September before the recent volatility and remain up strongly from lows a few weeks ago. Furthermore, recent reports indicate that nonmanufacturers are stockpiling the metal at cheap prices to sell it later for a profit, creating a floor. Maybe I’m deluding myself, but I am bullish on pricing and manufacturing in 2013 despite my mistake in 2012 on those fronts.
Valuation is attractive: Alcoa trades at a forward P/E of a bit more than 12, and trades for just 66% of its book value. Furthermore, Alcoa has only broken south of $8.50 for a handful of trading days between April 2009 — immediately after the bear-market lows — and today despite the fact that earnings are up dramatically since then. Admittedly, future EPS growth is set to be sluggish and revenue has recently slid. But the company is stable and seems at worst to be fairly valued.
Secular recovery hopes remain: Some investors mocked those nibbling at homebuilders Toll Brothers (NYSE:TOL) or PulteGroup (NYSE:PHM) in 2011. Who’s laughing now? TOL is up almost 80% in two years and PHM is up about 170%. The biggest gains are almost always made when investors get in a little early — not when they get in late and ride the uptrend after it takes shape. I remain convinced manufacturing and materials stocks will come back in the next 18 months. Maybe not in early 2013. Maybe not even by mid-2013. But unless you believe that the global economy is doomed for decades, you should start plotting an early entry into cyclical plays like Alcoa.

Foiled in 2012, Alcoa Stock Looking Up in ’13

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