Is It Time to Drop Alcoa's Stock From the Dow?

Alcoa (NYSE: AA  ) , a member of the Dow Jones Industrial Average, is supposed to be a key indicator of economic growth. That's why its earnings report is usually one of the most highly anticipated reports each quarter. Though, it certainly doesn't hurt that it's typically one of the first companies to report. 

However, while the rest of the economy is recovering it seems that Alcoa has fallen behind. Over the past year its stock is down more than 13% while the Dow is up by more than 13%. Worse yet, over the past five years the Dow is up almost 20% while Alcoa's stock has crumbled by nearly 80%. Just take a look at this brutal chart:

AA Chart

AA data by YCharts

Aluminum in general, and Alcoa specifically, appears no longer to be the key economic indicator that it once was. Even with a fairly positive outlook for aluminum, Alcoa just isn't producing much in terms of real returns for investors. That begs the question: Should this stock even be in the Dow these days?

It would make more sense, in my opinion, to have a more diversified miner added to the Dow Jones. In fact, I think the easy choice here is to go with Freeport McMoRan (NYSE: FCX  ) . It's the second-largest copper producer in the world; given the outlook for copper, it's a much better metal to gauge economic growth. In addition to copper, the company mines gold and molybdenum, which is an important metal used in steel production.

While it has diversity among metals, the company is also in the final stages of adding even more diversity among commodities. It has pending deals to acquire both McMoRan Exploration (NYSE: MMR  ) and Plains Exploration and Production (UNKNOWN: PXP.DL2  ) . When the deals close, Freeport will shift its revenue mix from 100% mining related to around 75% mining and 25% oil and gas. That makes the company a truly diversified economic indicator as copper, oil, and natural gas are much more important to our economy than aluminum.

I will say that over the past year Freeport's performance hasn't been all that great. In fact, its stock has actually underperformed Alcoa's stock by about 2%. However, I think its future is much brighter as it diversifies its revenue with oil and gas. Further, it has several important copper projects coming on line at a time when its tough to bring on new copper production.

In my opinion, the overall commodity diversity offered by Freeport is a better economic indicator than aluminum will be in the future. However, I'll stop short of calling for Alcoa's stock to be dropped from the Dow. Instead, you might want to consider dropping its stock from your portfolio in favor of Freeport's.

It's not all bad news for Alcoa. The company does control about 15% of global production of the highly consolidated aluminum industry. Because of this, Alcoa is in prime position to take advantage of growth that some expect will lead to total industry revenue approaching $160 billion by 2017. Based on this prospect and several other company-specific factors, Alcoa is certainly worth a closer look. For a Foolish investment perspective on this global giant simply click here now to get started.


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  • Report this Comment On April 18, 2013, at 10:10 AM, None123qwe wrote:

    Moron. The Dow Jones is an "industrial" index. FCX is not industrial, Alcoa is and its products are used in auto, aviation, and construction. I own FCX and I still think you have no clue. Maybe your bosses will read this and choose to hire someone who won't drive readers away from the fool

  • Report this Comment On April 18, 2013, at 12:16 PM, TMFmd19 wrote:

    @none123qwe - You might want to brush up on what stocks are actually in the Dow: http://money.cnn.com/data/dow30/

    I see banks, tech, energy... :)

    Matt

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