Please ensure Javascript is enabled for purposes of website accessibility

Why Alcoa Stock Jumped 32% in April

By Reuben Gregg Brewer – Updated May 7, 2020 at 10:12AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The aluminum company saw a big rebound in April, but it doesn't make up for the even bigger losses it's seen this year.

What happened

Shares of aluminum maker Alcoa (AA) rose 32% in April, according to data from S&P Global Market Intelligence. That easily outdistanced the broader market's advance of roughly 13%. But in March, Alcoa fell a disastrous 55% compared with the 13% decline for the S&P 500, and in the first four months of 2020, the stock is down 62% versus the market's drop of just 10% or so. Clearly there's been something bad happening here.

So what

Alcoa is focused on three main things. It mines for bauxite, a base ingredient in making aluminum, and sells part of what it digs up to others. It processes the bauxite it keeps into alumina, which is a middle step in the aluminum process, and sells some of what it makes to others. And then, from the alumina it keeps, it also makes aluminum -- all of which it sells to others.

The key thing across this value chain is that Alcoa's business is largely commodity based; it doesn't really make value-added products. That means that the company's top and bottom lines are highly dependent on often-volatile commodity prices. 

A person holding a raw aluminum ingot

An aluminum ingot. Image source: Getty Images

That has not been a good thing lately. Commodity prices in the aluminum space were heading broadly lower through most of 2019. And that trend continued in the first quarter of 2020. Alcoa's stock started heading lower right out of the gate in 2020. Although the downturn in March was steep and partly driven by Wall Street's risk-off mood in the face of COVID-19 health and economic issues, it wasn't exactly out of place when you look at the bigger picture.

In fact, the upturn in April, driven by investors taking a more positive view of the world's future, might be the real anomaly. The company's first-quarter adjusted loss of $0.23 per share, reported in late April, highlights the pain going on here. That said, it doesn't do full justice to the situation, since Alcoa lost the same amount in the first quarter of 2019. Digging in a little bit, adjusted EBITDA was off by 30% year over year, putting the situation into clearer relief.   

Now what

Aloca is not a bad company, but it relies on volatile commodity prices. Right now, prices for aluminum are relatively low. The impact of COVID-19 on economies around the world is definitely a part of the issue. With the world probably heading into a global recession, if it's not already in one, an upturn in the aluminum space seems unlikely in the near term. In other words, long-term investors should brace themselves for more rough waters for Alcoa. The ups and downs over the last two months probably won't be the last. 

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alcoa Inc. Stock Quote
Alcoa Inc.
AA

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.