What To Do With A Losing Stock – Alcoa

| July 9, 2008 | 0 Comments

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.

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.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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