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Alcoa: This Time Is Different

Nov. 03, 2017 9:12 AM ETAlcoa Corporation (AA)24 Comments
The Belgian Dentist profile picture
The Belgian Dentist


  • Commodities are very cheap and have positive momentum.
  • Alcoa is a pure commodity play after the break-up with Arconic.
  • Due to cost cutting Alcoa is in good shape to profit from rising commodity prices.

Time for value?

I'm not telling something new when I say that the US stock market is not cheap. The numbers in Exhibit 1 speak for themselves.

Exhibit 1: Worldwide valuations

This leaves US equity-investors two options:

  1. Invest in foreign stocks and/or
  2. Invest in US value stocks.

According to Franklin Templeton there's a strong historical relationship between value and non-US equities. Over the past two decades, non-US stocks have tended to outperform US stocks when value starts to work. Based on a positive outlook for commodities in general and aluminium in particular, Alcoa (NYSE: NYSE:AA) is trading at a forward PE of less than 10.

Commodities: at the start of a bull market

The most interesting investments are those that are at the same time undervalued and trending up. Do commodities fit into this category?

Let's first take a look at valuation. As we can see in exhibit 2, commodities are at a multi-year low compared to equities. The last time commodities were this cheap, was at the height of the dotcom-bubble.

Exhibit 2: Commodity cheapness

In the years after 2000 the Goldman Sachs Commodity Index quintupled...

When we look at the price chart of PowerShares DB Commodity Index Tracking ETF (DBC) we can clearly see that after the lows at the end of 2016, commodities are slowly but firmly trending higher.

Exhibit 3: Commodity uptrend

The investment clock

Is it a coincidence that commodities started trending up at the end of 2016, the moment the FED raised the rates a first time?

Exhibit 4: US Fed Funds Rate

According to the investment clock-theory, commodities are the best asset class in the overheat-phase. In this phase of the economic cycle, inflation picks up and central banks start raising rates.

Exhibit 5: The Investment Clock

Aluminium: the only way is

This article was written by

The Belgian Dentist profile picture
A private investor

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