Results highlight the core problem with the Alcoa share

<p>It’s easy to forget how far Alcoa (NYSE: AA) has fallen. After all, it was less than seven years ago that Alcoa shares were still one of the 30 components of the Dow Jones Industrial Average.

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Just four years ago, Alcoa’s revenue unofficially started the payroll season. That ended up being the case after Alcoa split into Arconic (NYSE: ARNC) and the “new” Alcoa. Arconic itself just split again, in a “new” Arconic and Howmet Aerospace (NYSE: HWM).

Of course, as Alcoa’s revenue on Wednesday afternoon shows, the split is not the only problem. Alcoa is simply not what it used to be. It is officially a small business at this time with almost any definition, with a market capitalization below $ 1.5 billion. If Alcoa’s results were earlier, the market would not necessarily notice.

At the same time, the report shows the broader issue of Alcoa’s decline. The company is not a leader. It responds.

To be fair, it depends in part on the company’s operations. Alcoa alone cannot control the price of aluminum. And it is certainly not responsible for the unparalleled reduction in immediate economic activity.

But investors are responsible for the stocks they choose. And especially in this market, the results show that there are much easier ways to find returns than the Alcoa share.

Alcoa’s results

As for the Alcoa share, it is as if Wednesday’s earnings report did not even happen. AA shares have basically tracked the market in trading on Thursday, which makes sense.

Alcoa’s figures moderately beat Wall Street expectations. But that hardly changes the investment case for the stock. Investors should look ahead, not backwards. And the release does little, if anything, to clarify the intense uncertainty surrounding the business.

But what the release shows is Alcoa’s strategy going forward. Some of the points from the results for the first quarter mark the direction in which the company is heading:

“Announce a reduction in the remaining 230,000 tonnes of non-competitive smelting capacity at the Intalco smelter in the state of Washington as part of the ongoing portfolio review.” “Continues to sell non-core assets, which generated $ 200 million through the sale of the Gum Springs facility in January.” “Plan cash initiatives to deliver $ 700 million by 2020 through savings or launches, including existing programs and new measures to address the economic uncertainty caused by the pandemic.”

Some of these efforts are due to falling prices caused by the impact of the new coronavirus. But many of the initiatives – including the sale of “non-core” assets – were under way even before this crisis.

This is simply a shrinking business. Again, this is not a new problem. Alcoa has been looking to sell assets for a long time. It closes plants. It split Arconic. For investors, it is extremely difficult to catch up and down in shares in a shrinking business.

A long-term problem

The strategy has not worked. If we look at the stock chart for Howmet Aerospace (which is technically a descendant of the divisions), the adjusted share price is back where it was in the 1980s.

And it is worth reviewing the outcome of the 2013 Aloca share from Dow Jones. Alcoa was replaced by Nike (NYSE: NKE). At the same time, Hewlett-Packard (NYSE: HPQ) was removed in favor of Visa (NYSE: V). Goldman Sachs (NYSE: GS) is replaced by Bank of America (NYSE: BAC).

The Goldman / BofA exchange is largely driven by changes in the financial industry. But the other two features of the index manager, Standard & Poor’s, were a response to changes in the wider world.

Nike and Visa were much more the stock of the future. In fact, after divestments, both shares still look attractive. Meanwhile, HPQ and AA were former stocks. The same was true for General Electric (NYSE: GE), which was removed from Dow 2018.

Successful investors look forward, not backwards. Looking forward, Alcoa sees a challenging industry that demands less capital and less revenue, not more.

Investors in this market have so many options to own growth at a reasonable price. It’s the strategy to take now, rather than owning a fallen giant.

The case for Alcoa Stock

To be safe, the Alcoa share is cheap compared to previous levels. Aluminum prices are likely to rise at some point. From here, it does not take much of a bounce for the profit to return to the green, which can lead to the share winning.

Truth be told, for Alcoa’s shareholders and employees, I hope the stock wins. I have no pleasure in watching an American company struggle. No one should do that.

But hope is not an investment strategy. Neither own a steadily shrinking business.

Which is not to say Alcoa has the wrong strategy. In fact, it is likely that the company will implement the best strategy it can. But that is precisely the problem. Investors have access to too many high-quality growing companies to own a company that is so packed.

Matthew McCall left Wall Street to actually help investors – by getting them into the world’s biggest, most revolutionary trends FOR anyone else. The power of being “first” gave Matt readers the chance to bank + 2,438% in Stamps.com (STMP), + 1,523% in Ulta Beauty (ULTA) and + 1,044% in Tesla (TSLA), just to name a few . Click here to see what Matt has up his sleeve now. Matt does not directly own the above-mentioned securities.