I wrote an article on Alcoa (AA) in October and thought the stock was going to go up. Soon after I wrote it, the stock declined and reached a low around 8. It has since rebounded and is trading closer to "9" and the momentum looks like it will continue to move up. Here is the trade I suggested initially:
The Options Play
The stock is presently trading at 8.71. I would look at a straight bearish options play on this stock as one who is looking to attempt a short term income play. While it is true that the aerospace industry has helped Alcoa's bottom line, I am not yet convinced that a bullish position is a good play for the stock. But at this point I do see it moving back up to "9" before year's end.
- Buy the January 2013 call with a strike of "9" (priced at $0.44)
- Risk: price of the stock
- Profit potential: unlimited
- Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Global economy is still contracting
- Lower earnings in the third quarter may move markets down along with Alcoa
- Its present pattern calls for a move down close to 8.0 which is support.
Even though Alcoa is being pushed way down, I believe this present move is reactionary and we will see the stock spike to 9 before January options expiration. This is what we are going to capitalize upon.
My prediction was a move back up to 9 before the year's end. The stock is on its way and we will see if it makes it or not. Besides this short-term income play, I am watching the aluminum company prepare for its global expansion when the economy turns around. I really like what I see and Alcoa may be a good long-term investment, but prudence would make me ask when I should invest in the company.
What will the wheel plant do for Alcoa?
Part of its expansion plans includes the opening of its wheel manufacturing facility in Sazhou, China. This is part of its overall growth plan for China. The company currently has a full wheel manufacturing, distribution, sales and service network in the country. This will go along with the same type of manufacturing facilities it has in North America, Japan and Europe. With this facility in place, China will benefit from Alcoa's industry-leading forged aluminum wheel technology that manufactures lighter, stronger and more fuel efficient commercial truck, trailer and bus wheels.
So Is Alcoa a good buy right now?
Alcoa is one of those global businesses that never sleep and has struggled recovering from the financial crisis of 2008. The demand for aluminum remains low and prices for the metal have dropped more than 15% year over year. The fact that China has a softening growth rate adds to the metal's demise. So with all this, today Alcoa struggles. What about the future? The stock may be at a good historical discount rate right now, but I am not convinced that the stock will grow in value for quite a long time. I have not read many positive reports on global economic growth for 2013 and this does not sit well for Alcoa going into a new year.
The company is presently laying a good foundation for global growth. Its joint venture with Ma'aden in Saudi Arabia will create 720 smelting furnaces and with the lowest cost producer in its history. It also has the venture with Bonneville Power Administration to use its aluminum smelter for 10 years. So it is preparing for a strong future. I cannot say the stock is a good investment right this second. Since I am wary of 2013's economy, the stock could possibly see more down side movement.
Momentum on this last move up is still with the stock. How far can AA go before it runs out of steam? Both the RSI and MACD indicators are both bullish and show no signs of weakening just yet. The MACD MAs are running parallel and this means momentum is with the upward move. The RSI is still moving up. For this reason, I do not think it is done moving just yet. It has to 8.9 until it reaches its first strong resistance. The stock is hugging the upper Bollinger Band and this may signify strength that could keep moving the stock forward.