Markets have rebounded tremendously since March’s epic selloff. But as investors price in a recovery from the novel coronavirus, there’s still plenty of stocks lingering near 52-week lows. This includes Alcoa (NYSE:AA) stock, which is down more than half since February. Yet, it wasn’t as if things were peachy for Alcoa stock prior to the outbreak.
The U.S.-China trade war took its toll on the aluminum and metals giant. However, with the pandemic hurting demand not just in America, but China as well, tough times continue for the company. Shares trade just above a third of where they were for most of 2019.
Yet, that doesn’t make the stock a prime place to “bottom-fish.” Why? You may think buying Alcoa today could be a shrewd contrarian play. If the economy rebounds, commodity producers like this stock could, in theory, rebound tremendously.
Sadly, that’s not the case in this situation. As I wrote last month, there are many factors that could affect demand, both short-term and long-term.
Simply put, trends are no friend for Alcoa stock right now. Barring stimulus from China, don’t expect this stock to be a winning investment anytime soon.
Low Demand Means Bad News for Alcoa Stock
A big problem for this stock is how factors outside its control can make or break the company. In other words, it’s easy for shares to move higher when demand for aluminum is sky-high. For tough times, such as now? Not so much.
The analyst community continues to be cautious on Alcoa stock. Aluminum demand domestically is expected to drop 13% this year. Until said demand picks up, or if producers like this company take drastic measures to cut supply, challenges could continue longer than expected.
But America’s weak demand for aluminum is just one variable at play. A greater one is the China factor. As I wrote back in March, Alcoa saw the developing economies of Asia as a key growth catalyst. Yet, in today’s environment, it doesn’t look as if that’s a viable needle-mover right now.
Sure, China is now in recovery mode post-pandemic. But, don’t expect a quick rebound. With global demand still weak, China’s manufacturing economy continues to struggle. In other words, a V-shaped recovery remains a long-shot.
A Chinese stimulus package, much like the one we saw here in America, could be the company’s only hope. Yet, as the world’s second-largest economy has yet to put one in motion, don’t hold your breath.
The macro situation looks terrible for Alcoa stock. And this is a key reason why shares remain a sell. Although the company’s fundamentals do have some bright spots, this is far from enough to push shares higher anytime soon.
Stable Balance Sheet Isn’t Enough
Based on analysis from Fitch, Alcoa’s balance sheet isn’t as bad as you would think. The global ratings agency rates the company’s debt as “stable.” However, don’t take this stability as a sign it’s time to buy.
The company may have modest debt levels, and the ability to handle its other obligations such as pensions. But this relative bright spot doesn’t give me confidence that shares will perform well in the coming quarters.
As I mentioned above, everything with this stock hinges on a pickup in aluminum demand. And in both America and China, that doesn’t look likely right now. The company’s facilities may have remained open despite the pandemic. But that doesn’t really matter if there’s fewer buyers out there.
There’s little the company itself can do but sit and wait. The recently announced closure of its Ferndale, WA facility is a step in the right direction. Cutting supply is one of the few ways this company can take an active role in bolstering prices. Everything else is in the end-user’s court.
Bottom Line: Alcoa’s No Economic Rebound Play
As markets recover, there are many stocks that could go higher as the global economy picks up again. But Alcoa stock is not one of them. As global aluminum demand remains weak, don’t expect the company’s fortunes to improve in the near-term.
Even though the company is cutting supply in order to minimize the impact of a supply glut, there’s little else the company can do to move prices higher. In short, shares could stay in single-digits for quite some time.
With this in mind, Alcoa stock remains a sell. Keep on avoiding it, and look elsewhere for opportunity.
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.