For subscribers to my
$100,000 Real-Money Portfolio
, you'll notice a clear set of rules I live by: Every pick has to
have solid downside support, potentially robust upside and clear
catalysts in place. Having just two of three investment merits
isn't good enough. You need all three to preserve capital and post
You should be thinking about these factors as you review your
existing investments through the upcoming
. If key factors behind your thesis start to wane, then you need to
seriously assess whether it's still worth owning that stock.
Well, one stock in my portfolio just broke the rules, so it's
time to sell it. It still has limited downside and potentially
robust (long-term) upside. But the single-biggest
underpinning my investment thesis has changed.
I'm talking about
, which I first added to my portfolio
in early January
at an average price of $9.59 a share. Back then, I noted that
Chinese government appeared intent on reducing that country's
output of aluminum, and in time, domestic demand would exceed
domestic production, making China a
just two months later
, I noted that Chinese production cuts were not happening as
planned. As a result, I predicted that "aluminum may be
headed for a pullback." At the time, it seemed premature to
assume that the Chinese government would completely derail the
supply and demand balance for this industry. So I chose to sell
half of my 1,000-share stake in Alcoa (at a profitable $10.21 a
share, for a 6.1% gain).
Well, we can now conclude that China is aggressively boosting
output and will keep aluminum from rallying any time soon.
Chinese smelters are now on track to add an additional 1.4
million tons of aluminum smelter capacity this year, according to a
just-release report from Merrill Lynch. (The fact that Europe now
looks a lot worse than it did six months ago, doesn't help the
So if a key pillar of my investment thesis (and catalyst for
medium-term upside) is now gone, then I need to be disciplined and
sell my remaining 500-share stake in Alcoa. Considering my 6% gain
on the first 500
sold and the likely 10-11% loss on the remaining share sale, my
investment in Alcoa has been a
Yet this whole scenario underscores my investment approach in
this portfolio. Even if a stock fails to fulfill the investment
thesis I've laid out for it, I still want to be shielded from major
losses. In fact, it's unlikely that Alcoa has much more downside
from here, thanks to a robust
, led by a global network of low-cost smelters. And I'll be
one of the first people to hop back on board the "Alcoa trade" when
industry dynamics turn.
After all, Alcoa is doing an outstanding job in the areas it can
control. Management has been aggressively paring the cost
structure, while low aluminum prices have enabled the company to
post solid margins in its
products such as extruded aluminum sheets. The just-announced $1.4
billion contract with Airbus was likely aided by the low prices of
I still think this stock could reach $15 or $20 in a few years,
but also think it's dead money for the rest of 2012. And with so
many other inexpensive stocks available that have near-term
catalysts in place, I want to free up funds to own them.
When will Alcoa become timely? Look for these mile markers:
• If and when China decides to curtail aluminum
production, then aluminum prices will likely start to rise.
• When signs emerge that Europe is exiting a continentwide
and is on track for meaningful gross domestic product growth, the
supply side of the equation will likely start to perk up.
• When the U.S.
is on a sustainably higher plane of growth.
Again, I don't think we'll be talking about these catalysts for
at least the remainder of 2012.
Action to Take -- >
I will sell 500 shares (or roughly $4,200 worth) of Alcoa 48 hours
after you read this.
Be sure not to miss a single thing and have
updates sent to your email inbox, free for a limited time, as soon
as they're published by signing up
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of AA in one or more if its "real money" portfolios.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.