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Small Cap Aluminum, CENX Prep for Round Three on Shoulders of Rising Aluminum Prices

|Includes: AA, CENX, Kaiser Aluminum Corporation (KALU)

The wrong company may be winning the aluminum race between Century Aluminum, Kaiser Aluminum, and ALCOA.

Today's biggest gainers from the small cap world were the aluminum stocks, which is to say, Century Aluminum Co. (CENX)... it's the only aluminum company technically classified as a small cap (S&P 600). All the rest are micro, mid, or large caps, Like ALCOA or Kiaser. In any case, Century Aluminum gained 6.6 percent to lead the industry to the head of the small cap class.

Is this a hint investors should take? Yes and no. Our bullish opinion on aluminum stocks in general - and small cap aluminum stocks specifically - dates back several months (a recovery play). The long-term out look hasn't wavered, but the success to date in owning shares of CENX has been a little disappointing.

As the nearby chart illustrates, Century shares are approaching the low $8 area, which has been a ceiling line more than once in recent months. Three times, to be exact. It will be tough to be impressed until we see that resistance broken here with this third attempt.

And therein lies the challenge. Last week, Century Aluminum reported its third quarterly loss in a row, which hardly screams 'recovery'. Analysts aren't looking for earnings this year or next year. 

So what the heck was everybody betting on Monday, or for the last two weeks (the stock's up 48% since July 10th) for that matter? In simplest terms, investors are betting the analysts are wrong about Century. Investors are betting Century Aluminum is going to be more like Kaiser Aluminum Corp. (KALU) and ALCOA Inc. (AA), both of which are expected to turn a profit next year.

For what it's worth, Kaiser was profitable last quarter, and ALCOA's loss of 26 cents per share last quarter was better than expected. Century Aluminum hasn't even been able to do that well.

One of the keys to Century topping expectations will (still) be the price of aluminum. The higher the price of the aluminum, the greater the demand. The greater the demand, the greater the top line as well as the greater the margins. Both pieces of the puzzle have to be laid though.

To that end, aluminum is now hovering at 80 cents per pound, well up from the 55 cents per pound seen in February of this year. That's still under the peak price of $1.48 per pound from July of last year, but the trend is much more encouraging now.

With that in mind, diverting your attention (and your dollars) from Century to an ALCOA or a Kaiser at this point wouldn't be a crazy idea. Owning some aluminum exposure somewhere is a merited, as all these stocks lost an undeserved amount of value over the prior year and a half; CENX even more so. And, it's just a good recovery-founded idea. But, Century needs to pull a rabbit out of a hat soon for the risk of ownership to be justified... which could start with a well-paced break above $8.00.