For years, investors have been waiting for the payoff when it comes to Alcoa (NYSE:AA). Many thought that the spinoff of Arconic (NYSE:ARNC) would unleash the inherent value several years ago. But with Alcoa stock down more than 70% from its highs earlier this year, things clearly aren’t working out.
So even at $5-and-change, this stock is still a pass.
Why? With economic production contracting rather than expanding, it leaves Alcoa in a tough bind. It needs major economic stimulus in China — and everywhere else, really — to get demand moving again. And that stimulus may very well come in the days and weeks ahead, but there is still plenty of uncertainty surrounding Alcoa stock.
Alcoa Is a Commodity Play
At the end of the day, Alcoa stock is a commodity play. Investors are betting on the underlying supply/demand dynamic of the aluminum and rolled aluminum markets. With the global economy slamming on the brakes with both feet, it’s going to create a surplus of supply around the world.
Of course, it doesn’t help that the overall stock market is getting hammered, with the S&P 500 now down 35% from its highs about a month ago. However, Alcoa stock is getting it from all directions. The market-wide volatility is one negative, but so too is its exposure to China. On top of that, the commodity market is being decimated as oil and other leaders get pummeled.
In Alcoa’s Investor Presentation last month, the company laid out several growth drivers. One of those catalysts called for developing nations in Asia to increase demand for high-value manufacturing. Another catalyst called for an increase in transportation vehicles to boost demand.
How do you think those end markets are faring right now?
We can’t blame Alcoa for what’s occurred — no one saw the coronavirus coming and no one saw such a disruption as a result. But that doesn’t mean we need to take outsized risks simply because they are present.
The Bottom in Alcoa Stock?
Down near $5 and investors are likely thinking, “you know, Alcoa stock is worth a shot.”
That may be. Shares could just about double from current levels and hit $10. If the stock fills the gap back up to $11, which it will likely do at some point, that’s a double. I’m not here to say that it can’t or won’t happen.
But the coronavirus selloff has given investors a unique opportunity to begin accumulating high-quality balance-sheet, growth and dividend stocks at attractive prices. Alcoa stock is none of those things. And so while it may climb up to $10 or $16, there are still a lot of long-term concerns in place.
Alcoa shares are clearly trying to hammer out a bottom down near current levels. On Monday March 23rd, shares made a new 52-week low before rebounding higher.
Should the market remain under pressure, it’s hard to imagine that Alcoa becomes a “go to” among investors. But even if it does, the long-term thesis is still a concern under current circumstances.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.