Although gold prices have taken a big hit of late and may be at
the onset of a major pullback, there's one metal that's only
recently started to rebound and is taking somestocks with it --
Since August of last year, aluminum prices have rallied from a
multi-year low of 82 cents a pound to the current price of 96 cents
a pound. Some say the shape of aluminum's price chart suggest a
breakout is imminent, while others say the breakout is already
Either way, with aluminum prices on the mend, companies like
Century Aluminum (Nasdaq: CENX)
are finding it's easier to turn aprofit . If aluminum prices
continue their march toward higher levels, then these companies may
post far wider profits this year than anyone is expecting, making
aluminum stocks a potential Cinderella story for 2013.
A picture is worth a thousand words
The past couple of years haven't been good for the aluminum
industry. After aluminum prices peaked around a two-year high of
$1.35 a pound in early 2011 and began to fall to that late-2012 low
of 82 cents a pound, aluminum companies commensurately suffered.
For example, Alcoa's per-share profit plunged from 72 cents in 2011
to only 24 cents per share in 2012.
Noranda Aluminum Holding (
watched itsbottom line slump from $1.05 a share in 2011 to 2 cents
a share in 2012.
Some other companies were entirely unprofitable ventures during
this same period.
The shape of aluminum's price chart, however, suggests the
aluminum industry is poised for a strong 2013.
For starters, aluminum prices have at the very least stabilized.
The current price of 96 cents a pound is the same prices the metal
was treading at in early January as well as in September 2012.
Aluminum is going through more than just a price stabilization
though. The falling trend lines have been breached. We've seen a
series of higher lows that have formed the bottom side of a
triangle, or a wedge. We've seenbullish crosses of aluminum's key
moving averages. It all points to an undeniable budding uptrend
from the metal, whether the pros think it should be happening or
There are a handful of well-known companies set to take advantage
of aluminum's rebound, including Century Aluminum, Noranda, Alcoa,
Aluminum Corp. of China (
Kaiser Aluminum (Nasdaq: KALU)
.Currency tension between China and the United States, however, may
be enough of a reason to steer clear of Aluminum Corp. of China.
Alumina may be best left avoided as well, as it's an Australian
company with heavy Chinese ownership that could bring an
unnecessary element of risk to the table.
This leaves Kaiser Aluminum, Century Aluminum, Alcoa and
Industry icon Alcoa is the easy and well-knownstock to own.
Aside from the fact that it's a well-known company, its size makes
it most likely tocapitalize oneconomies of scale . Yet, despite
years of cost cuts, Alcoa is still contending with excessive
expenses. The company's expenses were down 12% in the fourth
quarter 2012, but it made little difference in terms of
measurableearnings progress. Perhaps Alcoa's size is still more of
aliability than anasset at this point.
So it's the smaller aluminum stocks -- Kaiser, Noranda and
Century Aluminum -- that have quietly overcome the problems of
their small size to bring real value to the table.
Kaiser seems merely average on the surface. Thedividend yield is
only about 2%, and though itsnet profit margin of 6.1% is better
than Alcoa's 0.8% and Noranda's typical 5%, it's still only a
mediocre number. But Kaiser is on a growth binge. Sales were up 20%
in 2011 and 4.5% in 2012, despite last year's 20% plunge in
Noranda is certainly a bargain at almost six times trailing
earnings and 10 times its forward-looking income. What really
separates Noranda from the rest of the industry, however, is
itsvertical integration -- Noranda supplies a great deal of its own
raw aluminum, giving it tremendous control of its input
Finally, there's Century Aluminum, which isn't a bad company.
Though it's not been profitable on a trailingbasis , it's expected
to swing to a profit of 20 cents per share this year. Still, it's
important to listen to theanalysts about this stock though. CRT
Capital downgraded the stock in early January and Goldman did the
same late in the month.
Risks to Consider:
While a global economic malaise isn't good for any company, the
real key to earnings beats from aluminum stocks this year is the
metal's continued price increase. If aluminum prices slump, then
these stocks would be dragged lower no matter what's going on with
Action to Take -->
Among the six possible ways to play an aluminum rebound, my top
pick is -- surprise -- Kaiser. It's the only one of the top four
options that's really demonstrated it can consistently manage
expenses yet still facilitate growth. In addition to the recent 20%
increase in itsdividend , Kaiser Aluminum is the only one poised to
lead the group out of its rut with what could be a 20% (perhaps
more)upside by the end of the year.
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