Alcoa’s (AA) Outlook Ahead of Earnings

by Rick Pendergraft | April 9, 2012 2:17 pm

Believe it or not, Alcoa is set to release earnings tomorrow night and that will kick off another earnings season. It seems like the fourth-quarter earnings season just ended and yet here we are getting ready for the release of first-quarter results.Daily chart of Alcoa (AA)
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Looking at Alcoa (NYSE:AA[1]), the stock has been in a relatively tight range since its last earnings report. The stock has traded as low as $9.46 and as high as $10.92. When you consider the S&P is up almost 12% so far this year, that doesn’t reflect well on AA.

The mediocre performance has had little impact on sentiment toward Alcoa. Since the company’s last earnings report, there have been two analyst upgrades and two downgrades. In all, there are nine “buy” ratings, nine “hold” ratings and three “sell” ratings on the stock. Analysts expect the company to lose four cents per share on the quarter.

The short interest toward Alcoa has increased from 54 million shares to 75 million shares in the last four months. Even with the big increase in short interest, however, the short-interest ratio is only at 3.2. The short-interest ratio measures the number of shares sold short divided by the average daily trading volume. The average volume hasn’t changed significantly in recent months, so this goes to show how low the short-interest ratio was four months ago.

Looking at the recent options activity, investors have been adding more puts than calls of late and the open interest put call ratio has risen as a result. The ratio was at 0.57 in February and is now sitting at 0.71. While the increase suggests an increase in pessimism, this put/call ratio reading is right in the middle of the past year’s readings. The 10 strike is home to 65,000 calls in the April option series and the same strike shows almost 49,000 puts open.

What all of this analysis boils down to is that the sentiment is becoming more bearish with the short interest and the put/call ratio increasing, but the increases have only put them in the middle of the road. The readings are still a long way from being overly pessimistic.

With the sentiment indicators all seemingly falling in the middle ground, it will be difficult for Alcoa to move sharply in either direction.

Rather than playing a directional bet and buying puts or calls on Alcoa, your best bet would probably be to wait until after the announcement to see how the stock reacts. The premiums will be lower after the event as option premiums tend to increase ahead of earnings announcements and deflate once the earnings news has hit the Street.

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