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.

Daybreak
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?

Bottom Line
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.)

Related Articles
  1. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  2. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  3. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  4. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  5. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  6. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  7. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  8. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  9. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  10. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  4. How do hedge funds use equity options?

    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 >>
  5. Can mutual funds invest in options and futures? (RYMBX, GATEX)

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  6. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center