Will This Be Enough to Revive Alcoa (AA) Stock?

It’s been an interesting time for Alcoa, Inc. (AA) investors. Despite closing down last Friday, AA secured a positive lift for the week ending Nov. 20 — only the 14th time to do so this year.

Will This Be Enough to Revive Alcoa (AA) Stock?

On Monday, shares jumped nearly 4.4% after hedge fund Elliot Associates declared the company to be undervalued, disclosing a 6.4% ownership stake. The spurt of bullishness belies the fact that year-to-date, AA stock has lost more than 40% in the markets. It also suggests a potential turnaround, as half of the up weeks in Alcoa stock have occurred in the past 90 days.

Clearly, a pattern has developed, but why the sudden shift in investor sentiment? Responding to a number of critical changes in the aluminum industry, Alcoa — the biggest U.S. aluminum producer and ranked third globally — announced in late September that it will split its parts fabrication business from the commodities division.

The strategy is considered to be a shrewd maneuver in light of AA’s advanced aluminum technologies that have strong implications for the automotive and aeronautical industries. Alcoa has secured lucrative deals with Ford Motor Co. (F) and Lockheed Martin Corp. (LMT), which in theory should boost confidence towards AA stock.

Moreover, Alcoa’s chief executive officer, Klaus Kleinfeld, pushed aggressively to counter the often volatile cycles in the commodities sector. Having already closed overly costly facilities, earlier this month Alcoa announced major cuts in production.

According to a Bloomberg report, AA’s smelting capacity will be reduced by 503,000 metric tons while alumina refining will see a decrease of 1.2 million tons. The implied supply reduction helped lift the spot price of aluminum, which has been gutted over the past year due to global economic weakness. Alcoa stock also saw an immediate boost, moving to a high of $9.58 a day after the Nov. 2 announcement.

From a shareholder’s perspective, however, the joy was comically short-lived. Exactly two weeks after the production cut press release, AA stock closed down at $8.29, or a loss of more than 9%. The problem in the eyes of many investors is China. Even though there are signs that broad macroeconomics are improving — evidenced by strong moves in the iShares MSCI Emerging Markets (EEM) over the past three months — Chinese aluminum exports in the first three quarters of 2015 exceeded last year’s levels by 18%. That alone may offset the added value to Alcoa stock from the aforementioned business split.

AA stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

The primary challenge lies in the ability to effectively manage the tricky revolving door policy — growing the profitable parts fabrication business at a greater velocity than the losses incurred on the commodities side.

This will be no easy task. Despite AA stock’s near 50% free fall year-over-year, its price-earnings ratio is relatively high against its industry average, thanks to sluggish earnings growth.

Also, Alcoa stock’s balance sheet is messy, with a high debt level relative to cash on hand, and rising inventories that the company is showing difficulty in turning over. Combined, these factors show tremendous risk that contradicts an “undervalued” assessment.

The biggest hope for AA stock — its recent surge of bullish sentiment — may sadly be an illusion. There have been 32 weeks this year in which Alcoa stock dipped into red ink, with average losses totaling 3.4%.

The remaining positive weeks average gains of around 4.4%. The higher magnitude of bullishness, coupled with its low frequency (14 bullish weeks vs. 32 bearish weeks), suggests that the near-term optimism is merely reactionary. Like a quarterback who posts “garbage statistics” late in the fourth quarter, spurts of buying activity do nothing to change the overall game.

Ultimately, management is doing everything they can to support the company’s mission and to protect Alcoa stock’s shareholders.

The problem, however, of aluminum’s bearish cycle precipitated by global economic factors is bigger than any one organization can effectively handle without suffering bruising losses.

AA stock is therefore a day trader’s haven unless it can prove itself as something more than just a flavor of the week.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/11/alcoa-stock-fixes-revive-aa-stock/.

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