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  1. Home
  2. / Investing
  3. / Basic Materials

Alcoa Shares Are a Bargain Down Here

The $15 price forecast in a year is entirely reasonable.
By MIKE NORMAN Dec 15, 2015 | 02:00 PM EST
Stocks quotes in this article: AA, CMC

I'm nibbling at some metals companies' stocks these days. Last week I wrote about Commercial Metals Company (CMC), a steel product manufacturer and metals recycler. The company is trading about 10% above its 52-week low. Steel prices have been declining for four years, but industry experts are predicting a modest price rebound next year. The company's weathered the storm and remains profitable.

Today I want to talk about a much larger company, also in the metals sector, but it's aluminum, not steel. I am referring to Alcoa (AA), which is also about 15% off its 52-week lows -- but the stock has lost about half its value in the past month alone. An aborted rally let's call it.

This company has definitely weathered the storm of falling aluminum prices. Since peaking at around $2800 per ton in 2011, aluminum has fallen steadily to $1480 per ton today.

Despite this, Alcoa remains profitable. The company has produced positive earnings for 13 straight quarters. As for aluminum prices, they are forecast to increase by about 5% to 7% in 2016. More importantly, perhaps, at least as far as Alcoa is concerned, input costs have fallen substantially.

At the current price of around $9 share, it has a fairly high trailing p/e of 24. That's not usually a number that attracts me. On the contrary, I like to buy stocks with p/es of 15 or below. That equates to an earnings yield of 6.7% or higher. However, with interest rates so low (possible Fed rate hike this week notwithstanding) a 24 p/e is not overly crazy. Remember, too, that there's an "e" in that p/e ratio and if earnings rise next year the p/e ratio comes down making the stock even more attractive.

There are other interesting things going on here as well. According to the service "Insider Monkey," which tracks the trades and investments of large investors, there are two big hedge fund players holding substantial positions in Alcoa. One is Seth Klarman and the other is the notorious Paul Singer. I've written about Singer in the past with regard to his relentless pursuit of the nation of Argentina. Apparently, Singer is a guy who doesn't like to lose money and he is committed to using every tactic in the book to make sure he gets his way. (See Argentina.) That means he's a good ally to have on your side if making money is your goal. If Singer has no compunctions against doing battle with a country, then getting what he wants out of Alcoa should be a piece of cake.

Finally, it's been reported that there's a plan in the works to split the company into two separate entities by splitting off its legacy smelting business, which has been burdened most by high aluminum inventories and low prices. The other operating entity would be the company's automotive and aerospace division, which has seen stronger growth.

Bottom line is I like the stock down here at $9 or below. I bought some at $8.74 yesterday and own some at a slightly higher level. Forecasts are for a price rise to $15 in a year, and I think that sounds totally reasonable.

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At the time of publication, Mike Norman was long AA, although positions may change at any time.

TAGS: Investing | U.S. Equity | Basic Materials

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