Analyst Rates Alcoa Inc a "Buy." Should You Care?

According to Sterne Agee, the stock tickered "AA" will be a AAA investment.

Mar 14, 2014 at 6:00PM

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in this article, we won't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best...
There's great news for Alcoa (NYSE:AA) shareholders today, as analysts at investment bank Sterne Agee initiate coverage of the stock with a new "buy" rating and a $15 price target. Assuming the analyst is right, this suggests the stock could return a 27% profit over the course of the next 12 months -- and pay a 1% dividend yield to boot.

Across the aluminum industry, enthusiasm is mounting for Ford's (NYSE:F) decision to begin building aluminum-body pickup trucks in 2015. Word has it that General Motors (NYSE:GM) intends to copycat the move by 2018. Result: Within just a few years, both of the world's best-selling full-size pickup trucks will be consuming significant amounts of aluminum -- boosting the fortunes of aluminum makers like Alcoa.

But is that reason enough to buy the stock?

Let's go to the tape
Investors who choose to follow Sterne Agee's advice on Alcoa may find themselves in good company -- or they may not.

Here at Motley Fool CAPS, we've been tracking the performance of this banker's stock picks for close to eight straight years now. What we've discovered is that, over the course of making nearly 400 buy/sell calls, Sterne has racked up a record of outstanding performance relative to its peers. On average, nearly 54% of its recommendations turn out right, and Sterne's currently outperforming more than 96% of the investors tracked on CAPS.

That's the good news. Now, here's the bad news: Sterne has only a very limited track record in sectors related to aluminum. What's more, on average, Sterne gets only about 25% of its "Metals and Mining" industry picks correct:


Sterne Agee Said

CAPS Says (out of 5 stars possible)

Sterne Agee's Picks Beating (Lagging) S&P By

AMCOL International



7 points

Coeur Mining



(77 points)

Newmont Mining



(81 points)

Gold Resource Corp



(115 points)

As track records go, this one isn't particularly encouraging. While it's true that Sterne Agee did guess right once on AMCOL (a bentonite, chromite, and leonardite play), one could argue that the analyst actually missed the boat on that one as well. After Sterne closed its position on the stock back in 2012, the stock has actually gained 30%.

Late to the aluminum party
Sterne's arguably coming late to the aluminum party as well, endorsing Alcoa only after the stock has run up 37%, and doubled the S&P 500's gains over the past year. And now that Sterne has arrived, what does it choose to recommend?

An Alcoa stock that just reported a $2.3 billion loss for 2013, and that even when valued on the more forgiving metric of free cash flow, sells for a 33 times multiple to FCF. (Or more. If you factor Alcoa's debt load into the picture, the stock sells for an enterprise value that's 52 times its annual free cash flow.) 

One final thought
These are very high valuations that Alcoa shares trade for today. When you consider that most analysts agree the stock will grow its profits at no more than 7% annually over the next five years, they seem like valuations too steep for any rational investor to pay. Really, the only hope Sterne Agee has of its Alcoa bet paying off is if analysts have underestimated how a switch to aluminum by truck makers might affect aluminum demand -- and profitability.

They certainly might have. But consider: At the same time we see truck makers like Ford and GM moving toward aluminum, plane makers like Boeing (NYSE:BA) and Airbus (NASDAQOTH:EADSY) are shifting away from aluminum -- and toward the use of carbon composites in manufacturing their planes. That could easily counteract the trend of automakers shifting to aluminum. And what happens if, further down the road, the automakers also decide that they need to move to carbon composites to further lighten the load on their vehicles?

Let's just say this trend wouldn't be kind to the aluminum industry -- or to Alcoa shareholders -- and leave it at that. 

Investing in car-linked commodities is hard. Investing in cars is much easier
U.S. automakers boomed after WWII, but the coming boom in the Chinese auto market will put that surge to shame! As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this brand-new Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 400 out of more than 140,000 members. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information