When it comes to investing in U.S. aluminum stock, Alcoa (NYSE:AA) gets the bulk of investors' attention. That's not surprising, given that Alcoa is the largest aluminum producer in the U.S. and a member of the Dow Jones Industrial Averagem (DJIA). Alcoa is also the first blue chip stock to kick-off earnings season every quarter, and many market observers closely watch the Alcoa report as harbinger for earnings across the market as a whole.

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These superficial factors give Alcoa royalty-like status in the aluminum sector, but that doesn't mean the company is without competitors. In fact, Alcoa's recent earnings surprise (the company reported a third-quarter profit of four cents a share when analysts were expecting a loss of nine cents) may mean its time to look at the aluminum sector at large.

Aluminum is a commodity story, which means it is a China story to some degree, so that means investors in this sector need to stay abreast of supply and demand trends. The market may be expecting aluminum demand to pick. The Dow Jones U.S. Aluminum Index (DJUSAL) is up 11% in the past week, so let's take a look at two of Alcoa's big rivals.

  • Century Aluminum (Nasdaq:CENX) 52-Week Performance: -28.6% Price/Book: 0.85

  • Kaiser Aluminum (Nasdaq:KALU) 52-Week Performance: 27% Price/Book: 0.93

Going Along For The Ride
Century Aluminum has certainly benefited from the new bullish tone that aluminum stocks are singing, as the shares have risen 100% in the past three months compared to a 55% gain for rival Alcoa. With a market cap of just under $800 million, Century Aluminum is small compared to Alcoa, and has the volatility one might expect from a small cap commodities name. The stock has traded between $1.04 and $18.69 over the past 52 weeks.

Century Aluminum looks like a short-term play at this point, and recent options activity attests to that. On Thursday October 8, 2009, call volume soared to six-times the daily average, but that was countered by 16 times the usual put activity. Activity in the January 7.50 puts rose to over 20,000 contracts against open interest of less than 1,800 contracts, suggesting a strongly bearish sentiment. (Find out more about how the short interest can give insight into market sentiment in Short Interest: What It Tells Us.)

Investors should also note that Century Aluminum is heavily shorted with 27% of its float now residing in the hands of short sellers. If the market becomes even more bullish on aluminum, that will surely force the shorts to cover and that will drive Century's shares higher, but it is tough to endorse making a bet on that scenario unless your risk tolerance is quite higher. Century reports earnings after the close on October 27, so keep an eye on that report.

A Little More Stability
Kaiser Aluminum, like its rival Century, has a market cap under $800 million and wide 52-week range ($15.01-41.65). The shares have lagged Alcoa and Century, returning "just" 20% over the past three months. That said, Kaiser isn't seeing the bearish options action that Century is and Kaiser even pays a better dividend than Alcoa at nearly triple the yield.

Kaiser has only $7.1 million in debt, a relatively low amount for a commodities company, though there isn't much to brag about in terms of free cash flow. It goes without saying that Kaiser shares are held hostage to the same demand story that impacts its rivals, but some analysts see aluminum demand improving next year and that should be good news for the shares.

Kaiser reports third-quarter earnings on October 29, and analysts are expecting a profit of 29 cents on sales of $237.3 million. An upside surprise, similar to what we saw with Alcoa, could bolster Kaiser shares even further. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

The Bottom Line: Aluminum May Have Some Luster
If the global economy truly is in rebound mode, then aluminum should be one of the commodities that benefits. As is usually the case with commodities stocks no matter what their home domicile, China and other emerging markets hold the key to aluminum's growth prospects. Century is a volatile name that is not for the faint of the heart. With that, Kaiser's dividend offers investors some protection and makes it the superior choice to not only Century, but perhaps Alcoa as well.

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