Alcoa no better than coin flip as bellwether status fades

Since 1959

Alcoa, which rose 0.1% to $8.25 at 9:40 a.m. in New York today, was added to the Dow Jones average in 1959. The company is now the gauge’s least-influential member with a price-weighting of 0.4%, compared with 11% for IBM and 6.4% for Chevron Corp.

Alcoa, the world’s most valuable materials company in 2002, no longer ranks in the top 89. Its market capitalization has slumped 74% to about $9 billion, according to data compiled by Bloomberg.

The decline has threatened the company’s status as a bellwether, a term which originally referred to a bell-wearing sheep that leads the flock and indicates to the shepherd where to find his animals as they graze.

When Alcoa’s shares fall after it reports -- which happened 20 times in the past eight years -- the S&P 500 had had negative returns through the two months of earnings season 50% of the time, according to Ryan Detrick, a Cincinnati-based analyst at Shaeffer’s Investment Research. An increase in Alcoa shares after earnings was correlated with positive returns 69% of the time.

Coin Flip

“With this upcoming earnings season we wouldn’t put nearly the same confidence that we would just five or six years ago,” Detrick said. The company’s results now predict the direction of the market about as well as a “coin flip.”

“A $9 billion company is clearly not as significant as one of the top 30 blue-chip names,” Detrick said.

The number of large institutional shareholders owning Alcoa has dropped by 47% in the past 10 years, according to data compiled by Bloomberg. In the first quarter of 2003, 390 investment managers controlling $100 million or more said they held Alcoa shares. In March, only 208 such firms reported owning Alcoa shares.

Alcoa’s debt may be downgraded to junk level, Moody’s Investors Services said Dec. 18.

New Indicator

IBM is a better indicator because its products and services are more ubiquitous even than the metal used in beer cans, airplane wings and some pick-up trucks, Paul Hickey, co-founder of Harrison, New York-based research firm Bespoke, said in an interview.

“If IBM trades up on the day after earnings, the rest of earnings season will be positive 75% of the time,” Hickey said. “Their services unit is in every Fortune 500 company and practically every government of the world.”

Mining companies such as BHP and Rio Tinto Group have grown through acquisitions and building new capacity for several commodities, while Alcoa focused resolutely on aluminum. Russian and Chinese competitors have taken market share, leaving the company that invented modern aluminum processing as the world’s third-largest producer.

“The fundamentals for metals and mining equities have certainly delinked from other sectors,” Andrew Cosgrove, an analyst at Bloomberg Industries in Princeton, New Jersey, said in an interview. “That’s principally due to the fact that the aluminum markets are in oversupply. That’s what’s been driving the disconnect between metals and mining and the market as a whole.”

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