Commodities & Metals

Can the Metals Stocks Escape the Alcoa Black Hole?

Jon C. Ogg

In a bull market stock market, even the current raging bull market, some stocks and some sectors will underperform the market. In a market of stocks, even some of the great companies that date back into the 1800s can see their shares falter. Alcoa Corp. (NYSE: AA) reported dismal earnings for the fourth quarter of 2019. Now that it is no longer a member of the Dow Jones industrial average, many investors no longer even bother looking at the company. The problem with ignoring Alcoa is that it still has better than a $3 billion market capitalization, and the gains and losses it experiences can still bleed over into even the largest of competitors.

24/7 Wall St. routinely looks for issues that bleed into other stocks. With Alcoa being a leader in aluminum, the problem here is that many investors see problems in aluminum also translating into problems for companies involved in steel, copper, titanium and other industrial metals because there is such a high correlation and similar uses in many industries.

As Alcoa shares were down 10.2% at $18.12 late on Thursday, its consensus analyst target price from Refinitiv of $24.05 may seem too good to be true. The low of the day was $18.00, and Alcoa has a 52-week low of $16.46. The stock closed out 2019 at $21.51, and that was down an embarrassing 19% from the end of 2018, compared with nearly a 29% gain in the S&P 500 and better than 22% gain in the Dow. Again, some companies and sectors just do not rise even in strong markets when there are problems.

Value investors can still try to argue that Alcoa is cheap at less than 13 times next year’s previously expected earnings. After another bad earnings report, it’s up to each individual to decide how much they trust those forward valuations now. Many in the metal industries and related industries have pointed out that President Trump’s trade war with China acted as a drag on their businesses. Other companies in those sectors had previously cheered that they would get a fair playing field against China and other nations that dump steel and other metals into the U.S. and other industrial markets. There are other issues to consider as well, from the likes of Boeing’s halt on 737 Max production, the ongoing fears around “peak auto” units sold, less robust oil and gas trends, and even a change in consumer behavior trends compared with prior generations.

One problem for Alcoa and the metals sectors is that the stock market is supposed to discount news for three months, six months and sometimes even 12 months or more. A reality check is that the so-called Efficient Market Theory (or Hypothesis) doesn’t ever seem to work out when it comes to surprises. Otherwise, you would not have gains or losses of 10% or 20% in a single day. Even last June, the trend of downgrading steel stocks and related stocks seemed as though it was endless.

United States Steel Corp. (NYSE: X) announced right before Christmas that it would shut down a “significant portion” of its Great Lakes Works. In an effort to avoid looking like it was giving coal for Christmas to its employees with layoff announcements, the company delivered bad news to investors by slashing its dividend by 80% and also said that it was terminating its share buyback program. Oh, and it lowered guidance as well. U.S. Steel already had been downgraded to Sell at UBS with a low target price of $7 a month ahead of its bad news. Shares of U.S. Steel were last seen down 0.3% at $10.47, with a consensus target price of $9.62 and a 52-week trading range of $9.93 to $24.73.

Iron-ore miner Cleveland-Cliffs Inc. (NYSE: CLF), which announced in late 2019 that it would acquire AK Steel Holding Corp. (NYSE: AKS), was actually bucking the down day with a 0.6% gain to $7.85. Cleveland-Cliffs has a market cap of $2.1 billion, and it has a consensus target price of $8.28 and a 52-week trading range of $6.59 to $12.26. It is valued at 10 times future earnings in a screen, but earnings are in an expected decline, along with revenues.