Alcoa - suddenly a superstar
Submitted by Worth Blog
Written by Michael Vass
Well either I am a genius or I will be in the doghouse with good company.
Back on the 24th of February I stated that Alcoa was one of a small group of companies that I felt were undervalued. I was speaking of the market in general, what we can expect and in what time frame, but I directly mentioned that stock as an example of a long-term investment I like.
3 days later Jim Cramer made essentially the same kind of call on Alcoa. It was during his show and he considered it more speculative than I did. Still it was further confirmation of my original thought. Then the company slashed its dividend.
The inital reaction in the market was to sell the stock. I really can’t tell you why it’s a bad thing that a company hoards cash in a market environment that we are in. I assume that investors looking for dividend payments were upset and pulled out. Or some investors misunderstood that the dividend cut was an indication of trouble as opposed to avoiding it.
But a mere day later and what do you think happened? The company is up 18% and now there are analysts praising the company for ther move. Suddenly investors are looking at the stock, nearly 1 month after I first mentioned it.
In fact the Motley Fool just highlighted the stock as a potential stand out.
With shares down 86% in the past year, how much of the current downturn do you suppose is already reflected in today’s share price? If you’re like me and you come up with an answer of close to “all of it,” I think you’re on the right path.”
It only took roughly a month for the market to figure out what I already noted. Amazing. And for the record I do own Alcoa at $5.55, not the lowest it has been, but in the range of what I hoped for.
So now that there seems to be capitulation in the stock, with the lights coming on in various minds of institutions and investors alike what happens next?
Not much really. I took the view that the stock will languish, as will the entire market for 18 more months. The bump in price right now is great, but I don’t expect a whole lot more. Just as I think the entire rally of the last week is nothing more than a bull trap. Nothing has changed in the markets except the notion of bargains. The economy is no better off, and in fact I believe is getting worse with the efforts of the Obama Administration.
Add to this the increase in capital gains taxes, and the proposed gains in personal taxes and you get a net flat result until the stock hits roughly $9. At that point it is feasible for some speculators to get out. So it will reach pressure there I expect. After that threashold the stock should move on, slowly, to my personal target of $14 to $20. With any upside to the economy I think the stock trading at a dicounted book value of 1.5x is very fair and cheap. [I’m discounting the current book value of $14 to $10 - which is a huge revaluation.]
Will this happen? Not in the next 9 months. Probably not in the next 18. But in 24 months I think we will see it reach this level. At least that is my plan. That plan may not work for you, nor is there any way to be sure it will appreciate at all.
Essentially, before you rush out to buy a stock because it looks cheap or some market guru said it was do your homework. Figure out what is important to you. Determine what you expect and think the markets will do over a period of time. Then look for stocks that match your goals. A financial advisor is great for this approach.
If you do this, you too may be able to quote how the market is following your lead (at least for a while) because you figured out what they were too preoccupied to notice. Because there are definitely gems out there, if you can find them.
