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Alcoa no better than coin flip as bellwether status fades

By Sonja Elmquist, Bloomberg

April 8, 2013 • Reprints

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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About the Author

Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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mining 3077metal 3075financials 2975stocks 2123Standard & Poor 2008equities 1689New York 841New Jersey 590Barclays Plc 573earnings 303BHP Billiton Ltd. 157Alcoa Inc. 151Chevron Corp. 108Rio Tinto Group 101aluminum producer 80International Business Machines Corp. 78New York University 77Bloomberg Industries 66Glencore International Plc 29Alcoa 25Stern School of Business 18Bespoke Investment Group 15Klaus Kleinfeld 14Alain Belda 10aluminum products 8John D. Rockefeller 6engineered products 4aluminum processing 4Andrew Carnegie 4Douglas C. Lane & Associates 3Andrew Cosgrove 3Harrison 2Dow Jones Industrial Average 2Monica Orbe 2Paul Hickey 2Ryan Detrick 2Reynolds Metals Co. 1Inespal SA 1Cordant Technologies Inc. 1Shaeffer 1U.S. Steel Corporation 1jet-engine and electricity-generating turbines 1state-owned aluminum producer 1unprocessed metal 1Edward Dewees 1George David Smith 1Martin C. Hall 1Paul Heroult 1

Free Newsletter Modern Trader Follow

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