It’s easy to forget how far Alcoa (NYSE:AA) has fallen. After all, it was less than seven years ago that Alcoa stock still was one of the 30 components of the Dow Jones Industrial Average.
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Just four years ago, Alcoa earnings unofficially kicked off earnings season. That stopped being the case after Alcoa split into Arconic (NYSE:ARNC) and the ‘new’ Alcoa. (Arconic itself just split again, into a ‘new’ Arconic and Howmet Aerospace (NYSE:HWM).
Of course, as Alcoa earnings on Wednesday afternoon show, the split isn’t the only problem. Alcoa simply isn’t what it was. It’s officially a small-cap company at this point by almost any definition, with a market capitalization below $1.5 billion. If Alcoa earnings were earlier, the market wouldn’t necessarily notice.
Meanwhile, the report highlights the broader issue with Alcoa’s decline. The company isn’t leading. It’s reacting.
To be fair, that’s due in part to the nature of the company’s business. Alcoa alone can’t control the aluminum price. And it’s certainly not responsible for the unprecedented contraction in near-term economic activity.
But investors are responsible for the stocks they choose. And particularly in this market, earnings show that there are far easier ways to find returns than Alcoa stock.
As far as Alcoa stock is concerned, it’s as if Wednesday’s earnings report didn’t even happen. AA stock has basically tracked the market in trading Thursday, which makes some sense.
Alcoa’s numbers did modestly beat Wall Street expectations. But that hardly changes the investment case for the stock. Investors should be looking forward, not backwards. And the release does little, if anything, to clarify the intense uncertainty surrounding the business.
But what the release does show is Alcoa’s strategy going forward. A few of the bullet points from the first quarter earnings highlight the direction in which the company is heading:
- “Announcing the curtailment of the remaining 230,000 metric tons of uncompetitive smelting capacity at the Intalco smelter in Washington State as part of continuing portfolio review.”
- “Continuing to pursue sale of non-core assets, which generated $200 million through sale of Gum Springs facility in January.”
- “Planning cash initiatives to deliver $700 million in 2020 through savings or deferrals, including existing programs and new actions to address the economic uncertainty caused by the pandemic.”
Some of these efforts are due to plunging prices caused by the impact of the novel coronavirus. But many of the initiatives — including the sale of “non-core” assets — were in the works even before this crisis.
This simply is a shrinking business. Again, that’s not a new problem. Alcoa has been looking to sell assets for some time. It’s closing plants. It split off Arconic. For investors, it’s exceedingly difficult to capture upside in shares of a shrinking business.
A Long-Term Problem
The strategy hasn’t worked. Looking at the stock chart for Howmet Aerospace (which technically is the descendant of the splits), the adjusted share price is back where it was in the 1980s.
And it’s worth revisiting the 2013 exit of Aloca stock from the Dow Jones. Alcoa was replaced by Nike (NYSE:NKE). At the same time, Hewlett-Packard (NYSE:HPQ) was removed in favor of Visa (NYSE:V). Goldman Sachs (NYSE:GS) was swapped in for Bank of America (NYSE:BAC).
The Goldman/BofA swap was driven largely by changes in the financial industry. But the other two moves by the index manager, Standard & Poor’s, were a response to changes in the broader world.
Nike and Visa were much more stocks of the future. Indeed, after sell-offs, both stocks still look attractive. Meanwhile, HPQ and AA were stocks of the past. The same was true for General Electric (NYSE:GE), which was removed from the Dow in 2018.
Successful investors look forward, not backward. Alcoa itself, when it looks forward, sees a challenged industry that requires less capital and less revenue, not more.
Investors in this market have so many options to own growth at a reasonable price. That’s the strategy to take now, rather than owning a fallen giant.
The Case for Alcoa Stock
To be sure, Alcoa stock is cheap relative to past levels. Aluminum prices likely will rally at some point. From here, it doesn’t take much of a bounce for earnings to return to the green, which could lead the stock to gain.
Truthfully, for Alcoa shareholders and employees, I hope the stock does gain. I take no pleasure in seeing an American company struggle. No one should.
But hope isn’t an investment strategy. Neither is owning a steadily shrinking business.
That’s not to say Alcoa has the wrong strategy. In fact, it’s likely the company is executing the best strategy it can. But that’s precisely the problem. Investors have access to too many quality, growing companies to own a business that’s so boxed in.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
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