News Analysis date published New: 
Wednesday, February 20, 2013 - 14:30
New Date created: 
Friday, February 22, 2013 - 10:50
New Date last updated: 
Wednesday, February 20, 2013 - 14:30

The Best Stock for the Comeback Commodity of 2013

Wednesday, February 20, 2013 2:30 PM

Although gold prices have taken a big hit of late and may be at the onset of a major pullback, there's one metal that's only recently started to rebound and is taking some stocks with it -- aluminum.

Since August of last year, aluminum prices have rallied from a multi-year low of 82 cents a pound to the current price of 96 cents a pound. Some say the shape of aluminum's price chart suggest a breakout is imminent, while others say the breakout is already underway.

Either way, with aluminum prices on the mend, companies like Alcoa (NYSE: AA) and Century Aluminum (Nasdaq: CENX) are finding it's easier to turn a profit. If aluminum prices continue their march toward higher levels, then these companies may post far wider profits this year than anyone is expecting, making aluminum stocks a potential Cinderella story for 2013.

A picture is worth a thousand words
The past couple of years haven't been good for the aluminum industry. After aluminum prices peaked around a two-year high of $1.35 a pound in early 2011 and began to fall to that late-2012 low of 82 cents a pound, aluminum companies commensurately suffered. For example, Alcoa's per-share profit plunged from 72 cents in 2011 to only 24 cents per share in 2012. Noranda Aluminum Holding (NYSE: NOR) watched its bottom line slump from $1.05 a share in 2011 to 2 cents a share in 2012.

Some other companies were entirely unprofitable ventures during this same period.

The shape of aluminum's price chart, however, suggests the aluminum industry is poised for a strong 2013.

For starters, aluminum prices have at the very least stabilized. The current price of 96 cents a pound is the same prices the metal was treading at in early January as well as in September 2012.

Aluminum is going through more than just a price stabilization though. The falling trend lines have been breached. We've seen a series of higher lows that have formed the bottom side of a triangle, or a wedge. We've seen bullish crosses of aluminum's key moving averages. It all points to an undeniable budding uptrend from the metal, whether the pros think it should be happening or not.

Who wins?
There are a handful of well-known companies set to take advantage of aluminum's rebound, including Century Aluminum, Noranda, Alcoa, Aluminum Corp. of China (NYSE: ACH), Alumina (NYSE: AWC), and Kaiser Aluminum (Nasdaq: KALU). Currency tension between China and the United States, however, may be enough of a reason to steer clear of Aluminum Corp. of China. Alumina may be best left avoided as well, as it's an Australian company with heavy Chinese ownership that could bring an unnecessary element of risk to the table.

This leaves Kaiser Aluminum, Century Aluminum, Alcoa and Noranda.

Industry icon Alcoa is the easy and well-known stock to own. Aside from the fact that it's a well-known company, its size makes it most likely to capitalize on economies of scale. Yet, despite years of cost cuts, Alcoa is still contending with excessive expenses. The company's expenses were down 12% in the fourth quarter 2012, but it made little difference in terms of measurable earnings progress. Perhaps Alcoa's size is still more of a liability than an asset at this point.

So it's the smaller aluminum stocks -- Kaiser, Noranda and Century Aluminum -- that have quietly overcome the problems of their small size to bring real value to the table.

Kaiser seems merely average on the surface. The dividend yield is only about 2%, and though its net profit margin of 6.1% is better than Alcoa's 0.8% and Noranda's typical 5%, it's still only a mediocre number. But Kaiser is on a growth binge. Sales were up 20% in 2011 and 4.5% in 2012, despite last year's 20% plunge in aluminum prices.

Noranda is certainly a bargain at almost six times trailing earnings and 10 times its forward-looking income. What really separates Noranda from the rest of the industry, however, is its vertical integration -- Noranda supplies a great deal of its own raw aluminum, giving it tremendous control of its input expenses.

Finally, there's Century Aluminum, which isn't a bad company. Though it's not been profitable on a trailing basis, it's expected to swing to a profit of 20 cents per share this year. Still, it's important to listen to the analysts about this stock though. CRT Capital downgraded the stock in early January and Goldman did the same late in the month.

Risks to Consider: While a global economic malaise isn't good for any company, the real key to earnings beats from aluminum stocks this year is the metal's continued price increase. If aluminum prices slump, then these stocks would be dragged lower no matter what's going on with the economy.

Action to Take --> Among the six possible ways to play an aluminum rebound, my top pick is -- surprise -- Kaiser. It's the only one of the top four options that's really demonstrated it can consistently manage expenses yet still facilitate growth. In addition to the recent 20% increase in its dividend, Kaiser Aluminum is the only one poised to lead the group out of its rut with what could be a 20% (perhaps more) upside by the end of the year.

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James Brumley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.