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As Alcoa Goes, So Does the Market… Or Does It?

Alcoa doesn’t have the ticker symbol AA for nothing. It’s the first blue chip to announce earnings each quarter, and its results have often been taken as a predictor of what’s going to happen to the markets in the coming quarter.

But how accurate a bellwether actually is AA? Over the past ten years, Alcoa reported earnings that beat estimates a bit less than 50% of the time—19 out of 40 quarters. The S&P 500 then rose the following quarter 15 out of 19 times.

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But in the 21 quarters when AA reported EPS that missed estimates, the S&P fell the following quarter only 52% of the time—11 of 21 quarters. During the other 10 quarters the index went up. As a predictor of future market direction, that’s not much better than throwing darts.

Alcoa was long considered a bellwether because it manufactures aluminum—a commodity that’s very sensitive to fluctuations in the economy. But much economic smelting activity has switched to low-cost plants in China. At the same time, the market is increasingly focused on services instead of raw goods producers. (Though a component of the DJIA for more than 50 years, AA is now the smallest company measured by sales.)

So maybe investors should start looking at AA results as a confirming factor, not a predictor, much as we use odds enhancers at Online Trading Academy. When Alcoa’s struggling, the market can still be positive, but when Alcoa’s healthy the markets are that much more likely to be happy.

So how about 2013? The year thus far has been tough for Alcoa. Its share price has fallen about 9% while the S&P 500 has risen. The biggest problem is a supply glut that has dropped aluminum prices by 13% YTD. But Alcoa expects supplies to ease and is hoping for a 7% increase in global demand by year end (source: Yahoo Finance).

With results reported this past Monday, Alcoa did indeed beat the estimates. After adjustments for restructuring, earnings for the quarter ended June 30, 2013 were 7 cents a share, vs. an analyst estimate of 6 cents. Significantly, the good news came from productivity gains and Alcoa’s engineered products business, which makes aerospace fasteners, truck wheels, turbine blades and other finished products that have a higher margin than raw aluminum (source).

In after hours trading, when results were announced, Alcoa’s stock price was little changed. The following day, the stock was down by a penny.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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