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Bullish on Alcoa for the medium-term

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On its official website, Alcoa claims to have invented the Aluminum industry in 1888. They are world leaders in Bauxite mining, alumina refining, and Aluminum smelting. The current company was separated from the erstwhile parent company ‘Alcoa Inc’ in November 2016, which was renamed as Arconic Inc.

We dive deep into the factors that are in favor of Alcoa below.

High Aluminum prices that can rise even higher, low debt levels, a good buyout candidate, a great pedigree of 120 years and one of top 10 Aluminum producers in the world are some of the reasons that make Alcoa a good buy from a medium-term perspective.

  • Aluminum prices are likely to rally higher towards $2000 per ton
  • LME aluminum stocks level is depleting quickly
  • China factor will influence Aluminum
  • Strong quarterly performance
  • Analysts are bullish on the company
  • A good buyout candidate

High Aluminum Prices

Aluminum prices have risen sharply from the lows in October 2015 and are consolidating near the highs since February of this year. A breakout of the 52-week highs will push prices above the $2000 per ton, which is a positive for Alcoa because alumina and aluminum are its major revenue sources.

Depleting LME Aluminum Stocks Level will Support Aluminum Prices

LME’s Aluminum stocks level has fallen sharply from 5500000 tons to less than 1500000 tons in the recent months. Though some reports point to abundant off-market stocks of Aluminum, the market is still tightening. One of the reasons for a tighter market is China.

The China Factor can Push Aluminum Prices Higher

China is one of the largest miner, refiner, and user of aluminum. Therefore, it’s growth and internal policies regarding aluminum will affect its prices globally.

Chinese Premier Li Keqiang while speaking at the World Economic Forum’s “Summer Davos” event in Dalian, China, from June 27-29, said that his country was committed to addressing the climate change issues.

Li also added:

China’s economy in the second-quarter maintained the first quarter’s steady and improving momentum. We are fully capable of achieving the main economic targets for the full year. Currently, China also faces many difficulties and challenges, but we are fully prepared, reports Reuters.

Both the above issues are positive for aluminum prices, which is already an outperformer compared to steel and copper in 2017.

In our view, this strong performance has reflected an increase in the potential for aluminum to be the next target of supply-side reform in China, a tightening ex-China balance, and rising costs of production,” wrote Goldman Sachs analysts. “Further, global political developments may also be supportive of capacity and production cuts, given the two leaders of the U.S. and China launched a 100-day (trade) plan on April 7. These developments support our existing view that aluminum is the next target for supply-side reform in China.

Therefore, the investment bank is bullish on Aluminum with a price target of $2000 per ton in six months and $2100 per ton in a year.

However, UBS analysts believe that aluminum prices are unlikely to see a bump up similar to coal. “While the audit on illegal capacity is quite substantial, it’s unclear whether that will lead to a large closure of excess capacity,” said says Daniel Morgan, senior commodities analyst at UBS, who recently returned from an investor trip to China, reports The Sydney Morning Herald.

Only time will tell which of the two forecasts will play out. However, China has few options if it wants to protect its citizens from the hazards of air pollution. Therefore, we expect the Goldman Sachs thesis to play out.

So, we have more or less established that aluminum prices will either stabilize or rally about 10% from the current levels. However, how does this make Alcoa a good investment bet? Let’s analyze.

How has Alcoa Performed in the First Quarter of This Year

Alcoa has benefitted from higher alumina and aluminum prices as seen in the Q1 2017 results. Revenues have increased 5% sequentially to $2.7 billion. On these revenues, the company’s earnings before interest, tax, depreciation, and amortization (EBITDA), excluding special items, grew 59% sequentially helping the company to report an adjusted net income of $117 million, or $0.63 per share.

Financial Health of Alcoa and its Projections for 2017

The company has achieved a free cash flow of $3 million compared to negative $445 million of free cash flow on a carve-out basis in the same quarter of 2016. Alcoa’s return on capital at 6.2% was a huge 4.7% increase over the previous financial year.

The company has a total debt of $1.45 billion. However, with $804 million in cash, its net debt drops to $0.65 billion, which is very comfortable.

In 2017, Alcoa expects both Bauxite and Alumina to remain in a relative balance, however, it expects the demand growth for Aluminum to increase from its earlier forecast of 4% to a higher range of 4.5-5%.

It expects to earn an EBITDA of $2.1 billion to $2.3 billion in the current year with a targeted $50 million net performance improvement.

The company has also targeted a 200-basis point increase in its return on capital from a 2016 baseline to end-2019, normalized for market conditions and has targeted to match or better the returns of the S&P 500 index. Both these have been linked to the executive compensation.

Other Factors that can Cause Bullish Surprises

The analyst community is very bullish on Alcoa. There are 10 buy ratings and four hold ratings with an average price target of $41.1. The median P/E on current year’s estimate is 11.85, which is not high considering the S&P P/E which is above 21.

Recently, Gabelli analyst Justin Bergner reiterated his “Buy” on Alcoa with a target price of $50. Similarly, Goldman Sachs also has an aggressive target of $52 on the stock.

Meanwhile, rumors have been floating that rival companies are looking to buy Alcoa. If any company announces its intent to buy out Alcoa, it will offer a handsome return from the current levels.

What does the Chart Forecast for Alcoa?

Alcoa saw a nice run up from its lows to the highs of $40, reached in mid-February of this year. Price has been falling in a channel, which is a normal correction. A breakout of the channel will resume the uptrend in the stock opening up a possibility of a retest of the highs at $40, whereas, a fall can take it to the lower end of the channel at $28, which is a significant support.

We shall wait for a dip towards the $30-$31 levels to initiate a mid to long-term position on the stock. We shall keep a stop loss of $27 and expect the stock to reach its highs of $40.

Conclusion

We are in no hurry to chase Alcoa higher. We expect the S&P 500 to dip and Alcoa also to dip close to $30 levels, where we believe that it becomes a good buy. We want to hold this company for the medium to long-term as the future of Aluminum looks bright and Alcoa is a leaner and better company after its split from its parent.

Featured image from Shutterstock

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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4 Comments

4 Comments

  1. ishturman

    July 9, 2017 at 2:42 pm

    What timeframe is medium term? When you is good to buy and how many months. Is mrdium term?

  2. Rakesh Upadhyay

    July 9, 2017 at 3:10 pm

    Hello ishturman…

    I expect a correction in the S&P 500 to 2320 levels soon. At that time, I expect Alcoa to drop to about $31 or so. That should be a decent entry point as far as a good risk-reward is concerned. However, if the S&P 500 breaks 2320 levels, the purchase should be put on hold.

    As far as holding Alcoa is concerned, we expect Aluminum prices to increase in the second-half of this year into first-half of the next. Therefore, Alcoa should be held for anywhere between 1-2 years.

    Anything less than a year, I consider it as a short-term investment. 1-2 years is a medium-term play and anything more than 3 years is a long-term investment.

    Thank you

  3. felix

    August 3, 2017 at 11:23 am

    Hi Rakest,

    any update?

    Thanks

    • Rakesh Upadhyay

      August 3, 2017 at 12:35 pm

      Hello Felix,

      Alcoa never fell to our buy levels. The markets did not correct as I was expecting them to. At the current levels, Alcoa is very close to its overhead resistance of $40. I will prefer to wait.

      With warm regards
      Rakesh Upadhyay

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Commodities

Oil Prices are Surging Again as Supply Pressures Build

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Crude oil is on track for its fourth gain in five days after U.S. government data showed a much larger than expected draw in commercial crude inventories last week, adding to growing evidence of supply pressures.

Oil Price Update

U.S. West Texas Intermediate (WTI) for October settlement rose $1.68, or 2.6%, yo $67.52 a barrel on the New York Mercantile Exchange. The black commodity is on track for its highest settlement in 12 days after prices plunged to multi-month lows last week. The U.S. benchmark has gained 4.5% over the past five days.

Brent crude, the international futures contract, rose $1.68, or 2.3%, to $74.31 a a barrel on London’s ICE futures exchange. Brent futures have returned 4.8% over the last five days.

Inventories Drop

The U.S. Energy Information Administration (EIA) reported Wednesday that commercial crude inventories fell by 5.836 million barrels in the week ended Aug. 18. Analysts in a median estimate had called for a decline of 1.497 million barrels. Inventories spiked by 6.805 million barrels the previous week as imports surged.

In gasoline, EIA reported a build of 1.2 million barrels and an average production of 10.2 million barrels per day.

EIA’s report corroborated separate industry data showing a large draw in inventories last week. The American Petroleum Institute (API) on Tuesday reported a decline of 5.17 million barrels. According to analysts, this may have sparked the early morning rally leading up to the EIA report.

Earlier in the week, the U.S. government announced it would sell 11 million barrels from the Strategic Petroleum Reserve to keep the market well supplied in anticipation of renewed sanctions on Iran.

Dollar Softens

The U.S. dollar’s recent struggle to hold 13-month highs has also contributed to crude’s upward momentum. The U.S. dollar index (DXY), which tracks the greenback’s performance against a basket of six currencies, declined 0.2% to 95.10, a fresh two-week low. Since peaking at 96.73 on Aug. 14, DXY has declined 1.7%.

DXY has gained 3.1% since New Year’s Day in what has been a dramatic reversal for the greenback, which got off to one of the worst starts to a year in decades.

Oil and the dollar often exhibit an inverse relationship due to the fact that futures contracts are priced in greenbacks. A decline in the value of the dollar makes oil futures more attractive for holders of other currencies.

Global trade tensions and multiple interest rate hikes on the home front are expected to keep the dollar on firm footing in the near term. Next month, the Federal Reserve is widely expected to raise interest rates for the third time this year, possibly paving the way for a fourth upward adjustment in December.

Based on Fed Fund futures prices, the likelihood of a September rate hike is currently pegged at 96%. The probability of another lift-off in December is 62.8%.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 604 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Analysis

Platinum Update: Faces Life or Death Showdown

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The Platinum/US Dollar (XPT/USD) pair has been in a decade-long downtrend. In July 2008, the pair broke out of a double top pattern on the weekly chart after taking out support of $1,850. There were numerous attempts to reverse the trend and break out of the slump. However, every single effort was denied as bears held $1,850 resistance. As a result, XPT/USD is now trading around $800.

While bears seem to have the upper hand, there’s a case for a bullish reversal. In this article, we explore the bearish and bullish scenarios for the XPT/USD pair.

The Bearish Case for Platinum

In technical analysis, the prevailing trend remains until there’s a clear sign of trend reversal. As mentioned, XPT/USD is still in a downtrend. The downtrend was recently confirmed by a breakout from sideways consolidation on the daily chart in June 2018.


XPT/USD daily chart

The breakout quickly brought XPT/USD down to $800 support. While bulls are managing to hold on, it appears that their mettle will be tested soon.

Large Descending Triangle on the Monthly

The descending triangle is often a continuation pattern with a bearish bias. The lower highs of this pattern put enormous pressure on the support that it eventually snaps. We see this pattern emerging on the monthly chart of Platinum/US Dollar.

XPT/USD monthly chart

The pattern is enormous. It is large enough to keep many retail investors on the sidelines. From the looks of it, XPT/USD appears to have just completed the E-wave or the final dead cat bounce. With a new lower high in place, bulls are in for the fight of their life at $800.

The Bullish Case for Platinum

The good news for the bulls is that not all descending triangles are bearish. Sometimes, bulls use the price compression at the apex to take out the resistance.

The key issue to understand is that the pattern must be triggered first. If bears take out $800, then the market sinks deeper. If bulls breach the resistance, then that might just be enough to kickstart a bull run.

Double Bottom on the Monthly

If bulls win this battle, then many investors will look at the possibility of a double bottom reversal pattern on the monthly chart.

Possible double bottom of XPT/USD

The preservation of $800 support amidst the threat of a huge descending triangle paints a bullish picture. It should send a reverberating message that $800 is bull territory. This would attract all types of investors and may generate sufficient momentum to push the market back up to previous highs and create a double bottom reversal pattern.

Bottom Line

Bulls and bears are bound to have a showdown at the $800 support level. Whoever wins this fight gets to control the market in the coming months or even years. Bears have the upper hand but it looks like bulls have what it takes to pull out one big surprise.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.6 stars on average, based on 235 rated postsKiril is a financial professional with 4+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Commodities

Gold Price Is Getting Crushed as Dollar Reaches New 2018 Highs

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Gold’s brisk selloff deepened Thursday, as investors put higher interest rates on the front burner following two days of testimony from Federal Reserve Chairman Jerome Powell.

Gold Price Levels

According to Bloomberg data, the price of gold bottomed at $1,212.70 a troy ounce on Thursday, extending a three-month selloff that has shaved 11% from the yellow metal’s value. Gold peaked slightly above $1,360 in March and April before plunging over the next three months.

Bullion is trading at its lowest level in over a year, with technical charts putting the next major support level around $1,200-$1,202 an ounce.

Silver, which often trades in the direction of gold, was off more than 2% Thursday to a low of $15.19 a troy ounce. The grey metal later recovered around $15.30 but was still down more than 12% from January’s settlement high of $17.61.

Dollar Rally Intensifies

A surging dollar has largely underpinned the massive exodus out of gold over the last three months. The U.S. dollar index (DXY), which tracks the performance of the greenback against a basket of currencies, has gained nearly 7% compared to three months ago. DXY is up 3.6% for the year, more than offsetting its worst annual start in decades.

On Thursday, the dollar index rose more than half a percent to a high of 95.65, its best level of the year.

The dollar’s strength combined with Brexit woes triggered a fresh slide in the British pound, which fell on Thursday to its lowest since August.

The Canadian dollar declined sharply on tariff fears, sending the USD/CAD currency pair to its highest level of the month.

A stronger U.S. currency makes the purchase of gold and other commodities more costly for international buyers, which reduces their relative demand. On Wall Street, investors have shown a renewed penchant for stocks in anticipation of a strong earnings quarter.

Fed Chairman Jerome Powell on Thursday wrapped up his semiannual testimony before Congress where he fielded questions on the economy, protectionism and cryptocurrency. Although Powell didn’t strike an overly hawkish tone, he left little doubt about the central bank’s plan to raise short-term interest rates.

On Wednesday, Powell told lawmakers they can expect several years of economic growth under the current policy regime.

“With appropriate monetary policy, the job market will remain strong and inflation will stay near 2% over the next several years,” Powell said in prepared remarks.

The central bank “believes that – for now – the best way forward is to keep gradually raising the federal funds rate” in a way that keeps pace with the economic recovery, he added.

Federal Open Market Committee (FOMC) members will next meet July 31-Aug. 1 to set short-term interest rates. No change is expected before September.

Featured image courtesy of Shutterstock. 

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 604 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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