Is It Time to Buy Alcoa Stock?
Investors have been showing a strong dislike for Alcoa stock, which begs the question: is it time to buy? Over the past month, Alcoa shares have been downgraded multiple times, resulting in a significant increase in the number of Sell ratings. Surprisingly, 14.3% of analysts covering the aluminum miner now have a negative outlook on the stock, compared to the average of 6% for all stocks in the S&P 500. Additionally, only 36% of analysts have Buy ratings on Alcoa, well below the average of 55%.
This lack of favorability is reflected in the performance of Alcoa stock over the past year. While sentiment has turned against the company, its shares have experienced a decline of approximately 30%, in stark contrast to the 13% increase in the overall S&P 500.
However, for those willing to go against the grain, this could present an opportunity. Historical data suggests that when the percentage of analysts giving Sell ratings is high, Alcoa stock has the potential for remarkable gains. In fact, back in October and November of 2020, when analysts were similarly pessimistic about the stock, Alcoa experienced a remarkable surge of 310%. The share price skyrocketed from under $15 to above $50 in just one year. This pattern was observed again in early 2016 when shares were trading at less than $25 and eventually surpassed $40 within a year.
While zigging when others are zagging may not suit every investor’s strategy, there is evidence to suggest that now might be an opportune moment to consider investing in Alcoa stock. By carefully assessing the market and considering historical trends, investors may find potential for significant future returns.
An Opportunity for Alcoa: Defying the Analysts
Analysts may not have a favorable opinion of Alcoa, but this sentiment actually works in favor of investors who are seeking to capitalize on buying low and selling high. Beyond the analysts’ bias, there is a strong fundamental case for Alcoa. According to McDonald, the company is anticipated to generate $500 million of free cash flow and $2 billion in Ebitda (earnings before interest, taxes, depreciation, and amortization) by 2024. Surprisingly, Alcoa currently has a market capitalization of just $6 billion, and when considering its debt, it is only trading at four times Ebitda, significantly lower than the S&P 500’s 13 times.
However, for Alcoa’s stock to truly show promising growth, certain factors need to come into play. In 2020, the surge in aluminum prices played a significant role, soaring from approximately 85 cents per pound to around $1.40, reaching a peak near $1.75. Similarly, in 2016, prices rose from about 65 cents per pound to 85 cents. Could history repeat itself? Presently, aluminum prices have declined by about 7% in 2023 and have experienced a 12% drop over the past year. The outlook from Wall Street appears bleak, especially as Alcoa faces a downgrade from J.P. Morgan analyst Bill Peterson, who cites the anticipation of increased supply from China.
Nonetheless, one must consider that it doesn’t take much to ignite a rise in aluminum prices. As the saying goes, “it’s always darkest before the dawn.” This implies that there is still hope for Alcoa’s stock to regain momentum.