Alcoa is about to release earnings. Ponder the Bear Case Scenario for Alcoa or should we ponder the Bear Case Scenario for Aluminium.
Alcoa has thrived once it was ejected from the Dow 30. Yeah Alcoa Boo Dow Jones Editors. But is there a Bear Case Scenario for Aluminium and Alcoa. Alcoa has a current market value of about $17.6 Billion with an anemic dividend yield under 1%. Alcoa is often seen as a bellweather stock. As goes Alcoa so goes the economy.
Consider the rise of ETF’s based on aluminium $FOIL and $JJU. ETN’s based on futures contracts have their own inherent risks. Pure commodity plays with all the risks a futures contract brings. But they side step the corporate risk. currently Alcoa and competitors are rationalizing production and beating each others brains out in the market place. You win some you lose some.
Why not invest directly in the metal and bypass the corporate risk. Look at precious metals and carbon energy. Buy Gold or Oil and skip the expensive chauffeur.
Aluminium has struggled as a commodity and has not yet attracted a large following. But as Alcoa does better the question becomes can I side step executive suite risk and just take naked aluminium risk. As more investors discover the ETN they will lose interest in the old blue chip stock.
In the mean time there are some serious corporate issues that Alcoa must come to terms with.
The industry still has over-capacity which keeps prices down and margins skinny thin. Some competitors are avoiding curtailment waiting for the other guy to blink. Victory usually goes to the agile and nimble. Not to the biggest fat ass.
Large quantities of aluminum tied up in financing deals could hit the market if interest rates increase and cash-and-carry trades that capitalize on the contango in aluminum futures become less profitable.
So a few more beer cans are not going to do it.
George Gutowski writes from a caveat emptor perspective.