Since fundamentals are a little meaningless right now (income statements are as much opinion as they are fact, thanks to "one-time charges" that seem to be recurring), I've done quite well using a unique - and, perhaps, crude - method to find severely undervalued stocks.
IN PICTURES: 7 Forehead-Slapping Stock Blunders
Basically, I'm looking for industries that were beaten to a pulp since the middle of last year, but have been on a bullish roll very recently. The former says the stocks may be undervalued, while the latter says the problem is being corrected. Don't laugh; it works. I think the approach is spot on right now for aluminum stocks.
Cold, Cold, Cold, Hot, Hot...
Of the 200+ industries I follow, care to guess which one has the worst 12-month performance? The biggest losers are actually insurance companies, which are still in the hole by 81% going back to the end of April last year. However, aluminum stocks made a good showing in the race for last, with a 75% loss since the end of April 2008.
Now care to guess which group is up 47% since the end of March 2009? Aluminum stocks. More importantly (and based on a deep, deep drubbing prior to the renewed bullishness), the industry is experiencing a recovery trend with real legs... something that can't be said for too many emerging industry rallies. So far so good? Great, but keep reading.
The Worst Is Over
Nobody loves a wave of bullish momentum more than I, but I'm not naive enough to think a bad company can hoist its stock higher forever. Eventually, these stocks are going to have to prove their mettle. Before we examine any of these stocks deeply, I want to preface with this opinion: I think projected numbers assume the worst, while investors realize 2009 is going to be better than 2008. With that said...
There's little question that slumping commodity prices and weakened demand drove aluminum profits into the ground. A year ago, aluminum was priced around $1.30 per pound, and on the way up. By March of this year, aluminum cost less than 60 cents per pound, which doesn't leave much room for margin.
The Numbers Confirm It
Alcoa (NYSE:AA) managed to turn $26.9 billion of revenue into a $74 million loss in 2008, and Q1 of this year didn't look any better. Sales declined gradually over those five quarters, while gross profits were whittled away to almost nothing during the recently-reported quarter.
Aluminum Corporation of China's (NYSE:ACH) 2008 was almost a carbon copy of Alcoa's progressively worsening year. The company's 9.2 million RMB ($1.2 million) in profit attributable to shareholders in 2008 was almost comical compared to 2007's earnings of roughly 10.8 billion RMB ($1.3 billion). You get the idea.
There's a light at the end of the tunnel, however... a light some investors already are seeing.
Although still only about 68 cents per pound, aluminum's price trend is on the way up. At the same time, the economy's "green shoots" are real. Factor in a whopping $2.25 trillion worth of global stimulus, and the demand that could be fostered for aluminum could quietly become huge.
How so? Aside from the general rebirth of the consumer, China's stimulus specifically encourages the purchase of household appliances. A big chunk of France's stimulus will land in Airbus' lap. The U.S. stimulus hopes to prompt the sale of autos, but the bulk targets infrastructure projects. Each of those industrial arenas uses aluminum. (Mutual funds devoted to keeping roads, structures and communities safe can make you money. Learn how in Build Your Portfolio With Infrastructure Investments.)
Alcoa is expected to return to profitably within twelve months - an excessively pessimistic view in my book, given what we know as of now. Although I don't have any supporting information regarding the Aluminum Corporation of China, I assume profits are expected to return in the foreseeable future as well. Both could be big wins for buy-and-holders.
Greater Risk, Greater Payoff Potential
If you're looking for something a little spicier, however, take a look at Century Aluminum (Nasdaq:CENX) or Kaiser Aluminum (Nasdaq:KALU).
Century's getting no love from anyone in the forecasting business. Analysts don't expect a profit, even by 2010. But that doesn't quite jive with the 600%+ gain since mid-March through the close on May 7, does it? It's the most speculative of the bunch, but also the one with the biggest payoff potential.
Kaiser's first quarter numbers weren't as great as Q1's from 2008, but earnings of any size are an improvement to the company's mid-2008 results. Perhaps Kaiser is through the worst of the storm?
Aluminum... not exactly on mainstream radars, but that "forgotten" aspect is what I like. (Find out which futures, options or funds will be your perfect commodity portfolio fit in How To Invest In Commodities.)
Stock AnalysisJ.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
Credit & LoansThese terms may sound the same, but they mean very different things for homebuyers.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
InsuranceTough times call for desperate measures, but is raiding your life insurance policy even worth considering?
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
Fundamental AnalysisA decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
EconomicsWill remaining calm and staying long present significant risks to your investment health?
Stock AnalysisIs DKS a bargain here?
Investing NewsA third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>