What To Do With A Losing Stock - Alcoa
The Dynamic Wealth Report
July 9, 2008
More Problems At Alcoa - Here's What To Do
A few years ago I had the opportunity to visit Pittsburgh. It’s an
amazing but somewhat tired city. Some of you don’t know this, but
Pittsburgh is also called the Steel City. Back at the turn of the 20th
century, the local economy was built predominantly on heavy
manufacturing and steel production. By 1911 it’s estimated the city
produced as much as half of the nation’s steel.
So it shouldn’t be a surprise the local pro football team’s named the
Steelers.
The entire city is made up of Steeler fans. Locals are fanatic about the
team. Unfortunately, this week some bad news rocked the city. The owners
of the Steelers are not so secretly shopping the team, looking for the
highest bidder. The Rooney family has owned the Steelers for more than
75 years.
Now in the hands of the third generation of the family, the brothers are
starting to head in different directions. This division is forcing a sale
of the fabled team. A sale of this magnitude would be a blow to
the city of Pittsburgh, and Steeler fans everywhere.
Unfortunately, that’s not the worst news to come out this week.
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Another Pittsburgh company is suffering. Alcoa (AA), the global aluminum
giant announced earnings this week. Despite the aggressive PR spin, the
news was horrible. I’ll tell you why in a minute.
Alcoa is famous four times a year. They’re the first of the companies in
the Dow Jones Industrial Average to announce earnings every quarter.
It’s widely recognized their earnings announcement sets the tone for the
rest of earnings season.
Many investors were surprised how flat and out of key the tone was!
If you take a look at aluminum prices you’d see they’re up almost 40%
since January of 2006. A respectable run. Alcoa’s shares however traded
around $30 in January of 2006 . . .and today? Well, today they trade for
$32 a share.
This makes no sense. Other commodities are up and up big. Look at gold
and the gold miners. Look at corn, wheat, or soybeans and the companies
involved in their production.
What’s wrong with Alcoa?
Some analysts point to a lack of Chinese demand. It makes some sense.
China seems to be gobbling up all of the world’s commodities. But
aluminum’s different. According to my sources, China’s able to make all
the aluminum they can consume. As a matter of fact, China produces more
aluminum than the next two largest countries combined (Russia and
Canada).
Clearly demand for aluminum isn’t quite like other commodities.
But wait, there’s more demand issues. The use of aluminum is closely
tied to the economy. With the global economy slowing, demand for the
commodity will fall. Continued problems in the airline and automotive
industries aren’t helping either. They’re both major consumers of
aluminum.
Cost of production is increasing.
The cost of manufacturing the shiny metal is skyrocketing. Most people
don’t realize this, but Alcoa is one of the largest consumers of energy
in the world. Aluminum is produced through electrolysis requiring
massive amounts of electricity. And the cost of this electricity is
going up every day.
The PR Spin.
Sometimes I really wonder what “Wall Street” is thinking. Research
analysts were commenting how great of a quarter it was for the company. One even upgraded the stock. Please explain this to me. Raw material
costs are up. Energy and production costs are up. And despite rising
prices on the spot markets, the end markets for aluminum are weakening.
Where is the good in that?
The results were less than exciting. Alcoa announced profits of $546
million. Not bad . . . till you compare those results with last year. Those profits are DOWN more than 23%. Yeah!, profits only fell by $169
million dollars – great news.
If you ask me, analysts are trying to cover up a bad report by saying it
could have been worse. Bad is bad, and this doesn’t bode well for the
Dow and the rest of the market.
An investment in Alcoa is basically flat since 2006. This is a perfect
example of dead money. You haven’t lost money, but you haven’t made much
either. If you own Alcoa you have two options. Your first
option is to just dump the stock entirely. Sell out and take whatever profit or loss you
might have. Then reinvest the money in another stock with better
potential.
Your other choice is to try and profit from Alcoa using a covered call
options strategy. The company stock looks range bound to me. Use this as
an opportunity to sell call options and collect the premium. By
including the current dividend of 2%, you might be able to eke out a
decent return. It’s not great, but better than a sharp stick in the eye.
• Oil ($137 per barrel)
Oil prices fell almost $10 over the last few weeks, only to rally today.
The volatility in oil is being driven by news more than anything.
Iran test firing missiles didn’t sit well with oil traders today – and
prices are up again.
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