Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Alcoa (NYSE:AA) stock is the gift that keeps on giving -- then giving it all back.

Up more than 150% over the last five years (and up 80% since President Trump's election), Alcoa's stock chart paints a map of peaks and valleys. It's waxed and waned with optimism over the fate of aluminum -- and fallen 15% in four days after reporting earnings last month.

Before that, though, Alcoa enjoyed a surge past $60 a share on hopes that Trump administration tariffs on aluminum imports would boost profits at American aluminum producers. The stock is still up a lot even after its post-earnings sell-off (56% over the last 12 months, in fact), which may lead some investors to think there's still time to sell Alcoa shares and take some profits.

One analyst, however, thinks doing that would be a big mistake.

Aluminum rolls stacked against a blue sky

Jefferies forecasts blue skies for Alcoa stock. Image source: Getty Images.

Going wobbly on aluminum

Investors are worried that the Trump administration is going wobbly on tariffs, and rethinking its plans to implement sanctions against Russian aluminum producer Rusal. Either action would result in more foreign aluminum entering the American market, depressing pricing power at local producers.

Rather than sell Alcoa, though, investment banker Jefferies & Co. is urging investors to take advantage of overly pessimistic predictions, as explained today in a write-up on StreetInsider.com (subscription required). In Jefferies' view, Alcoa is a buy, and Alcoa stock could be worth as much as $65 within a year.

Cash is king

According to Jefferies, there are two main reasons to buy Alcoa stock. For one, the company is showing "free cash flow growth." And for another, all that cash flowing into Alcoa is helping the company to make "further improvements to its balance sheet."

Both arguments have merit.

Reviewing the data on S&P Global Market Intelligence, we see little change in the company's debt position, with long-term debt holding more or less steady at the $1.4 billion level over the last two years. Cash is another matter, however. Alcoa has in fact managed to grow its cash position every year for the past three years straight, with the result that, today, Alcoa's $1.2 billion in cash nearly balances the $1.4 billion in debt on its balance sheet.

This modest net debt load pushes Alcoa's enterprise value up to $9.9 billion. At the same time, however, Alcoa is generating positive free cash flow at the rate of nearly $800 million a year (more than five times its level of reported GAAP profits).

Valued on that free cash flow, Alcoa stock now sells for a multiple of just 12.4, and is significantly cheaper than its 45.6 P/E ratio makes it appear.

Valuing Alcoa

Against that free cash flow valuation, Alcoa sports a projected earnings growth rate of 11.3%, giving the stock an enterprise value-to-free-cash-flow-to-growth ratio of only 1.1. That's very close to fair value (if not quite there yet). And it's not the end of the story.

According to Jefferies, in addition to the attractive valuation, Alcoa stock offers investors "a free embedded call option on alumina and aluminum prices." These prices have been generally rising since Trump took office, albeit they've recently taken a bit of a tumble on the aforementioned wobbliness in tariffs policy. If the Trump administration ultimately does follow through on its tariffs and sanctions threats, however, aluminum prices could spike higher -- carrying Alcoa shares along for the ride.

So long story short? Thanks to last month's sell-off, Alcoa stock is finally at or near price levels at which I think the shares start to look attractive. It's not 100% there yet, but Jefferies is right: If aluminum prices take off again, Alcoa shares shouldn't be far behind.

I think today's price is close enough to a buy level to be worth placing at least a small wager on continued growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.