What happened

During earnings season, one often gets to see glaring examples of how irrational the stock markets can be. How else do you explain a stock slumping right after it reports its strongest quarterly numbers in years? That's what happened with Alcoa (NYSE:AA) shares after the aluminum company reported its earnings on July 15.

But as is also often the case, investors soon sensed an opportunity, and Alcoa stock has bounced back remarkably this week -- it's up 14.4% so far this week as of 9:40 a.m. EDT Friday.

So what

Alcoa reported its second-quarter numbers on July 15 after market close. It was the company's strongest quarter since 2016, when it became an independent upstream aluminum company after the-then Alcoa split into two.

Here are some notable numbers from Alcoa's Q2 report:

  • Average realized price of aluminum up 63% year over year;
  • Revenue up 31.9% year over year;
  • Record net income of $309 million versus a net loss of $197 million in Q2 2020; and
  • Total debt of $2.3 billion and cash balance of $1.65 billion as of the end of the quarter.

In short, it was a stellar quarter. Why then did Alcoa shares fall after earnings?

A person looking excitedly at stock price charts on computer.

Image source: Getty Images.

One reason is that despite strong profits, Alcoa generated negative cash from operations as it used a significant chunk of cash to add to its pension fund. But with the company now having funded 90% of its global pension requirement, Alcoa's cash flows could improve in the coming quarters if aluminum prices remain firm.

Investors also realized that the sell-off in Alcoa shares wasn't logical given its upbeat outlook for the rest of the year. To top that, several analysts jumped in and upgraded their price targets on Alcoa shares this week for multiple reasons. While Citi put a price target of $52 a share on Alcoa, Morgan Stanley and Goldman Sachs believe Alcoa is worth $51 a share. With so many analysts seeing such huge upside in the stock, Alcoa was bound to rally. 

Now what

Alcoa is on strong footing right now for one big reason: soaring aluminum prices thanks to high demand from sectors like automotive, driven by the economy's reopening and manufacturing restarts. That's boosting the company's cash reserves and fortifying its balance sheet, which could go a long way in helping Alcoa ride out the cyclicality in commodity markets. Long-term investors understand this and have therefore wasted no time in bidding Alcoa shares higher.

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.