Commodity stocks have been hammered in last two months. Some stocks in the sector are trading not much above where they were in midst of the crisis in 2008/2009. This leads to some interesting opportunities for patient investors. One stock in the space worth nibbling at is Alcoa (AA).
Positives for Alcoa:
- The company is trading under where it was two years ago even though operating cash flow is roughly double those levels.
- A couple of insiders made the first buys in quite some time in mid-April.
- Although the stock is down some 20% in the three months, consensus earnings estimates for the last ninety days have stayed stable.
- There is appears to good technical support levels here (See Chart) and not much above the bottom of the financial crisis.
Four reasons Alcoa is long term value bet at just over $8 a share:
- The stock is selling at the bottom of its five year valuation range based on P/B, P/S and P/CF.
- Alcoa sells for less than 9 times forward earnings, a discount to its five year average (16.0)
- The stock is dirt cheap at 65% of book value and just over 4 times operating cash flow.
- The mean analysts' price target on Alcoa is just under $12 a share.
Note: Given the increase volatility that is improving option premiums, a good way to play this is to sell the Jan $7.50 puts for 80 cents.