To make money in stocks, you need to focus on companies BEFORE
everyone else does. And while many think of
Alcoa (
AA
)
, the second investment in my $100,000 real-money portfolio, as an
out-of-favor cyclical play, I see a company that is on the cusp of
rotating back into favor.
Of course, nobody likes to buy a stock in the face of imminent bad
news. Falling aluminum prices throughout the last quarter clearly
set the stage for a tough
quarterly report
. Last week,
I predicted
that "the company will actually deliver a small loss instead of the
consensus $0.08-a-share forecasted
profit
." (The consensus forecast stood at $0.03 a share in
earnings
for the fourth quarter when I wrote that, but had fallen to a $0.02
a share loss forecast by the close of trading on Monday, Jan. 9.)
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Why buy a stock that is likely to miss forecasts? Because as I also
wrote last week, "the
market
anticipates a sorry outcome, and there's a solid chance investors
will start to focus on management's expected long-term
bullish
outlook for supply, demand and pricing."
How did things turn out? Well, Alcoa lost just $0.03.
How did
shares
react? As of this writing, they are actually modestly higher in
after-hours trading
. That's because
CEO
Klaus Kleinfeld predicted that global aluminum demand would rise 7%
in 2012, compared with 2011 levels. His bullishness largely stems
from production plans at
Boeing (
BA
)
and Airbus, along with auto makers that are using an increasing
amount of aluminum in vehicles to save weight. Alcoa predicts
demand will exceed supply in 2012, and if that happens, then
aluminum prices could well finish the year closer to $1.10 or even
$1.20 a pound. Prices are currently near $0.93. (Alcoa makes money
when this figure moves above $1.)
Make no mistake, Alcoa had a tough year in 2011. Slumping aluminum
prices offset so many of the savings that the company has achieved
the last few years. Still, Alcoa managed to generate more than $1
billion in operating
cash flow
(and more than $600 million in
free cash flow
) in that lousy fourth quarter. Cash rose from $1.3 billion at the
end of the third quarter of 2011 to $1.9 billion at the end of the
fourth quarter. As I wrote last week: "Alcoa is now positioned to
post respectable free cash flow in tough times, and poised to post
stunningly high levels of cash flow when the global
economy
perks up."
Also of note, aluminum inventories shrank from $3.2 billion in the
third quarter to $2.6 billion in the fourth quarter. That
underscores the company's notion that a glut of aluminum is being
worked off, which should have a positive future impact on pricing
and profits.
In the next few days, analysts will issue updated profit forecasts
for 2012.
Ignore them.
These forecasts are pegged off very depressed aluminum prices. If I
read this correctly, demand will slowly rebound as China continues
to swing deeper into a "
net importer
" position,
spot
prices for aluminum will rise, and so will analysts' estimates.
Their view at the start of 2012 has little to do with their view
later in 2012.
Action to Take -->
On Thursday, Jan.11, I will be adding to my current 300-share
position with another 700 shares, bring my total position to 1,000
shares.
Here's the Latest Snapshot of my $100,000 Real-Money
Portfolio...
-- David Sterman
David Sterman does not hold positions in any securities
mentioned in this article. StreetAuthority owns shares of AA in one
or more if its "real money" portfolios.