Commodities are one way to view the economy and in turn glean something about the stock markets. With gold rising to over $900 an ounce recently, this has put investors and traders in mind of the historical precedents for rising gold prices, such as a cheap dollar, and the preference of some investors to hold the precious metal instead of the currency, or to have some portion of their portfolio in gold or gold futures. While many traders use options and futures to trade commodities, few actually take physical possession of wheat, corn, or oil futures in the same way they do gold—that’s simply Investing 101– but some traders and investors will buy shares in commodity based stocks. One such group of stocks is industrial metals, where one of the leading stocks and companies continues to be Alcoa, Inc. (NYSE: AA).
Alcoa is a refiner and producer of aluminum, which is used extensively in many industries, and is ubiquitous in consumer products. It is used in technology, along with other industrial metals. Three-quarters of Alcoa’s revenues are dependent on aluminum, so the price of the commodity directly affects Alcoa’s revenues. The process of producing aluminum uses electricity in an electrolytic process to refine the aluminum from bauxite by first extracting alumina. After alumina is extracted from the bauxite, the oxygen is removed; what remains is aluminum. Alcoa is involved worldwide in aluminum operations, and in all phases of the aluminum refining process.
Alcoa has most recently been in the news when it announced it was attempting to take a $14 billion stake in Rio Tinto (NYSE: RTP), a copper and mining company which has been sought by other partners as well, notably BHP Billiton, Ltd. (NYSE: BBL). Alcoa has a $29 billion market cap, with $30 billion annual revenue and $2.2 billion net income in 2006. Its estimates for the full year in 2008 are $2.91 a share and $3.24 a share in 2009. Trailing twelve-month earnings are $2.65 share.
The stock price has traded in a range from $26.69-$48.77 a share, most recently inching up over $30 a share into the $34 range. Although this stock is traditionally a slow, steady grower, with its twelve-month price range roughly the same as its five-year trading range, commodities such as industrial metals historically can have potential price surges. While technical traders watch the charts and the futures actions in the commodities markets, fundamental investors need to realize that industrial metals, unlike precious metals, will more directly both affect and be affected by the economic cycles of industrial use. Still, Alcoa is a formidable entity in the metals market, where astute investing or trading can yield sizable gains.
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