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Aug 11, 2020

Aluminum Stocks Soaring—Before and After Tariff Reinstatement

Few industries have outperformed aluminum over the last three months. This past week President Trump announced that he would reinstate a 10% tariff on Canadian aluminum that enters the United States. That announcement could have disrupted the rally in some aluminum stocks, but that doesn’t seem to be the case.

The Tickeron aluminum industry group has six stocks in it. It features companies like Alcoa Corp (NYSE:AA) and Arconic Corporation (NYSE: ARNC). Aluminum is widely used in industries like construction, packaging, and the automotive sector.

Aluminum has seen an increase in demand from the automotive industry because it helps improve fuel efficiency. The U.S. aluminum industry generates nearly $71 billion a year in direct economic impact according to The Aluminum Association.

Looking at the industry performances on Tickeron’s Group Screener, the aluminum industry has moved up 14.65% in the past week and that is the third best performance. The rally in the industry has been pretty persistent too because if we look at the top performing industries over the last month, aluminum is seventh in terms of top performances at 26.95%. And if we go out to the top performances in the past quarter aluminum is third once again with a gain of 85.18%.

Looking at the six stocks included in the group, Tickeron has a positive outlook on this group and predicts a further increase by more than 4.00% within the next month with a likelihood of 57%. There is one stock rated as a “strong buy”, four are rated as a “buy”, and one is rated as a “sell”. Arconic is ranked the highest as the strong buy.

The lone “sell” in the group is Aluminum Corporation of China (NYSE: ACH). Ironically, the company has the best fundamental ratings of any stock in the group, but the scorecard is more short-term in nature and sees the stock struggling in the coming days.

None of the other companies do very well in the fundamental categories. One area in particular that is worrisome is the Profit Vs. Risk Rating. Four of the companies get the worst possible score of 100 and the other two have scores of 98 and 96. Those are extremely high and are likely the result of the big run up in the stocks over the last three months.

The stocks fare much better on the technical analysis screener and two indicators in particular show bullish signals across the board. All six stocks have received bullish signals from the MACD indicator within the last five days. All six have also received bullish signals from the Momentum indicator within the last three weeks.

As I was researching the six stocks in the group, I looked at a couple of the sentiment indicators for each stock. I looked at the overall analysts’ ratings and I looked at the short interest ratios for each stock. The table below shows the results of that research with the analysts’ ratings scored as buy, hold, and sell ratings.

I was very surprised by how little analyst coverage these six stocks are getting. Alcoa is a household name and only has 12 analysts covering it at this time. Howmet Aerospace is the only other stock with more than three analysts covering it.

Even the few analysts that are covering these stocks aren’t very bullish on them. There are a total of 24 analysts’ ratings on these stocks with only seven “buy” ratings. There are 16 “hold” ratings and there is one “sell” rating. If we look at the collective ratings, only 29.2% of them are buy ratings. That is woefully low considering the buy percentage for the average stock is between 65% and 75%.

What this information suggests to me, based on a contrarian line of analysis, is that we could see aluminum stocks continue to rally. There is very little chance of massive downgrades since the ratings are so low already. If anything we are likely to see an increase in coverage for the group and potentially upgrades. The odds of seeing upgrades is certainly higher than the odds of downgrades.

The average short interest ratio is in the 3.0 range. We see with this group that there are three stocks with short interest ratios that are higher than average and three with ratios that are lower than average. The thing to remember about short interest ratios is that a high one can help push a stock higher if the short sellers have to cover their positions. A low short interest ratio doesn’t mean it will force the price lower if the stock doesn’t rally.

Related Ticker: ARNC
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