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Aluminum smelting at an Alcoa plant.
Courtesy of Alcoa
If people hate what they fear,
Alcoa
must be one of the most feared stocks around. And that could mean it’s time to buy.
Sure, hate may be a strong word, but Wall Street has at least a strong dislike for Alcoa stock (ticker: AA). The shares have been downgraded three times in July, twice to Hold from Buy and once from Hold to Sell. After those cuts, 14.3% of analysts covering the aluminum miner have Sell ratings or the equivalent on the stock, above the average of 6% for all stocks in the
S&P 500,
while just 36% have Buy ratings or the equivalent, well below the average of 55%.
Alcoa is out of favor on Wall Street, and it’s getting worse. A year ago, 57% of analysts covering the stock rated shares Buy and none rated shares Sell. Alcoa stock, though, has slid right along with sentiment. Shares are down about 30% over the past 12 months, while the S&P 500 is up 13%.
Zigging when others are zagging isn’t for everyone, but in the right situations, it can be rewarding. And this might be the right situation for Alcoa. “The last time the percentage of analysts’ ‘Sells’ was this high, the stock ripped 310%,” writes Larry McDonald of the Bear Traps report.
That was in October and November of 2020, when Alcoa stock was trading for less than $15. A year later, it was above $50. A similar thing happened in early 2016 when shares were trading for less than $25 apiece. A year later, they were above $40.
Being disliked by analysts, of course, doesn’t guarantee trading profits, though it does help investors in their quest to buy low and sell high. And there’s a fundamental case for Alcoa as well. McDonald expects that the company will produce $500 million of free cash flow and $2 billion in Ebitda—short for earnings before interest, taxes, depreciation, and amortization—in 2024. Alcoa has a market capitalization of just $6 billion. Including its debt, it is trading for just four times Ebitda, well below the S&P 500’s 13 times.
Still, something has to change for Alcoa’s stock to start working. Back in 2020, that thing was aluminum prices, which surged from about 85 cents a pound to roughly $1.40, before peaking near $1.75. In 2016, prices went from roughly 65 cents a pound to 85 cents. Could a similar surge happen now that aluminum prices have fallen about 7% in 2023 and 12% over the past 12 months? Wall Street isn’t optimistic. It is, after all, the one downgrading Alcoa stock. J.P. Morgan analyst Bill Peterson, for one, warned of more supply coming online from China in coming months when he downgraded Alcoa shares to Hold from Buy on July 14.
Yet it wouldn’t take much to get aluminum prices to start rising again. As the cliché goes, it’s always darkest before the dawn.
Write to Al Root at [email protected]
Source: https://www.barrons.com/articles/alcoa-hated-wall-street-good-news-stock-c3af89d?siteid=yhoof2&yptr=yahoo