Jonathan Yates: Emerging market investors should always keep an eye on the direction of securities in the aluminum sector. Equities such as Alcoa (NYSE:AA) and exchange-traded funds such as iPath DJ-UBS Aluminum TR Sub-Idx ETN (NYSEArca:JJU) may be well off their year highs – but they’re on the rebound.
Like the exchange-traded note for copper, iPath DJ-UBS Copper TR Sub-Idx (NYSEArca:JJC), Alcoa and iPath DJ-UBS Aluminum TR Sub-Idx ETN offer insight into the strength of the global economy.
While no longer the world’s biggest aluminum producer, Alcoa is a play on worldwide demand. As detailed previous articles on www.emergingmoney.com, the company has operations in many emerging market nations.
Unlike gold (NYSEArca:GLD), aluminum and copper are critical industrial materials. That is why the trajectory of the JJC and the JJU on the chart below demonstrates such a strong correlation between the two commodities.
Recent reports of slower growth in emerging market nations such as China (NYSEArca:FXI), India (NYSEArca:EPI) and Brazil (NYSEArca:EWZ) have sent both aluminum and copper to the downside — and declining growth for the euro zone is not helping.
Thanks to the most recent downward move, Alcoa has a high short float of 7.22%. A short float of 5% is considered to be troubling for a company.
Alcoa certainly looks more promising in recent trading, however, as it is up 8.87% for the last week. There is much to like on the balance sheet and income statement: the forward-price-to-earnings ratio is 10.18. Earnings-per-share growth this year is 112.94%. Over the next year, earnings-per-share growth is estimated to be 81.13%. The price-to-sales ratio is 0.44. The price-to-book ratio is 0.79.
But while Alcoa is currently trading under $10.30 a share, the mean analyst target price over the next year is $11.58.
Institutions own almost 60% of AA shares, which is bullish. When growth returns to the global economy, the share price of Alcoa will rise.
For the last week, the iPath DJ-UBS Aluminum TR Sub-Idx has increased by 1.70%.
The iPath DJ-UBS Copper TR Sub-Idx has appreciated 4.35% over the same period.
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