Alcoa (AA)

Split into 2 companies, Alcoa (AA-N) and Arconic (ARNC-N). He likes them both. Alcoa is a classic deep cyclical, where he bought it down 75%. Shares have rallied, but this is the commodity side. With all the shutdowns, aluminum demand is outstripping supply, so Alcoa has started to rally, with the new US rule requiring more aluminum content in cars. Arconic is a great value added area. These are cyclicals, so you buy them when they have no earnings, and sell them when they are selling at 6X earnings.

Manufacturers of aluminum have not been very good stocks. Profit margins are not very good. He does not like to own stocks that lose money at the bottom of a cycle, and this is certainly one of those companies. There is a lot of risk with this.

(Market Call Minute.) Not particularly good momentum, highly volatile and low ROE’s. Has not been able to grow earnings. This is a Short for him.

Wouldn’t go into this just yet. It is still firmly in the value investor camp. Starting to gain traction and commodity stabilization is starting.

(Top Pick June 2/15, Down 29.16%) They are a low cost producer and can still generate cash flow at reduced commodity prices. You have to step in at low prices because if you wait for the commodity price to increase you will miss it.

(Market Call Minute.) This is looking a little bit cleaner now and has gone through some really tough stuff. He would give it a little more time.

This is a Short for him. It falls into the cyclical category of stocks, but doesn’t hit enough of his metrics to be a Buy. Low ROE at 6%. It also has a debt problem. Weak price momentum. Very volatile. 1.3% dividend yield.

A pretty solid company. They are splitting their upstream and downstream operations. She is not putting money into the commodity space as she would rather wait for everything to stabilize.

Chart shows a rounded bottom running from 2011 to 2014, and then it topped. A classic top with a bunch of peaks, and then it broke the neck line, tested, and then fell further. Since that time it has been pretty much in a downtrend. Until it bases, he wouldn’t touch this.

Tied to the commodity complex and so he shies away from it. They are not in control of the commodity. There has been a historic oversupply of aluminum.

In the process of splitting into 2 different companies. Commodity will be one and “value added” the other. US auto demand, in terms of aluminum, will be rising sharply over the next couple of years because of new emission standards. Every time they increase emission standards, cars incorporate more aluminum. Increasing Chinese supply has been putting pressure on aluminum pricing. Supply demand is slowly coming back into a better picture, and he thinks over time this is worth double the current share price.

We are back to the $8 level that it was at when they took it out of the DOW. You have to think there is value here as it is at the lows of 2012/2013. He would have half a position right now.

Doesn’t have a lot of investments in base metals because the dollar is strong and there is weakening demand from emerging markets. They are splitting the company in 2. Aluminum is not a commodity that China needs to import. They can produce it domestically.

This has very strong seasonal characteristics. Historically it moves higher from around the latter part of November right through until late April of each year. Technically the stock is not looking good. It is still in a downward trend and has recently hit a new low. There are no signs of a bottoming yet.

The problem is that their destiny really isn’t in their control. There has been an imbalance between supply and demand with far too much supply. Have been shuttering production for years to try and create more of a balance, but the wildcard is China which produces a ton of aluminum.