Alcoa – my investment update

Back on Febrary 24 of this year I was discussing the stock market and economy. At the time I was mentioning my expectations for a continued drag on the market, and that there were several opportunities to be had. One of those opportunities was Alcoa (AA on the NYSE).

At the time Alcoa was severely below book value. So I took the opportunity to buy the stock at $5.55 and decided to follow the investment with my readers. On March 19th I stated that the target I was looking for was $14 – $20 and expected the stock to reach that in 18 – 24 months. My basis was via a valuation based on a then discounted book value of $10.

On April 14th the stock stood at $9.25, a solid 67% return. And at the time the market was still shaky. Unemployment numbers were just starting to exceed the projections of the Obama Administration (even after authorizing a $787 billion stimulus package meant to curtail unemployment). And I decided to see what would happen if I hypothetically traded the stock and repurchased after the 30 day tax window.

On May 18th I proved that holding a position, while the fundamental reasons for owning the stock have not changed, outweighs the concept of trading a stock. the net difference was small, but when you are talking about losing money that you could have kept even a small amount makes a difference.

All that being said, I now will inform my readers that I sold half my position in Alcoa (AA). My sale price was not my $14 low end target, nor the $13.60 it recently reached as a high. I sold the position for $11.60. A tidy 109% profit. And I continue to own some of the position as I still believe that under my original outlook, the stock should reach $15 – $20 in the next year. Though the book value of the company has dropped as I factored into my expectations.

But I want to also share with you my next intention. And this is based far less in empirical numbers than the shape of the economy. I plan to buy E-Trade (ETFC on NASDAQ) at the open of the market. I expect to get a price of $1.50 or so.

My reasoning is simple. One of 3 things are going to happen to the company in the next 18 months.

  • The stock will be bought. This option is highly likely as the financial markets need to condense to maintain profit margins, and the tax burden plus economy will decrease the number of investors. The actions of Congressional Democrats and the Obama Administration are the leading forces in this option.
  • The company will fold. In this economy this is always an option. Bear Stearns and Lehman Brothers proved that. But since this company is directly tied to smaller individual customers, making their own decidions, it is politically dangerous. Too many voters are tied to the company to allow it to die. In addition the political ramifications of a well-known financial company like this failing defeats any thought of competence among Democrat leaders in Congress or the Presidency. I call this a long shot.
  • The company will improve. The company will seek out other smaller companies, or those in trouble, to increase it’s market share. As I mentioned above, consolidation is a critical need for financials right now. More assets, that have no connection to real estate, are highly valued and essential to growth. This will mean the book of the company will grow and thus the value therein.

    As a bonus, E-Trade also has another factor that I like. It is trading around .5 of book value. In addition it is held 20% by insiders and more importantly 44% by institutions. Thus the company is worth more absorbed or liquidated than as it exists. Even discounting the book value significantly the company is worth more just on the basis of the number of active and long-term accounts it holds.

    My guess is that there are too many institutions holding this stock. They all couldn’t get out without killing each other, and certainly not at a profit. Thus a take-over is likely to happen. In fact it is logical considering all likely factors.

    I would expect this company to be aquired for around 3x book or roughly $9. But again I will adjust the current numbers down and discount the book value to $2 per share. Which gives a takeover price of $6.

    I may be wrong on this price, or the exact nature of what moves the stock higher. But I believe the chance of the stock collapsing is minimal. So I will take the shot. My target, without a takeover is still $6, as once the stock rises above $5 it becomes marginable and will rise on that basis.

    Keep in mind one thing as I say all this. A stock trading at $1.50 is expected to go bankrupt. The real challenge is to get out of the stock before it does so. Thus any good news will lift the stock dramtically, while negative news is already priced in generally.

    Before you follow any of this advice, speak to an investing professional. I used to be a stockbroker and I have several factors I use for my own decisions. I have not discussed them all here, nor will every investor be willing to assume risk as I do. Think about any investment before you make it.

    Now let’s see how well I do with this.

  • About the Author

    Michael Vass
    Born in 1968, a political commentator for over a decade. Has traveled the U.S. and lived in Moscow and Tsblisi, A former stockbroker and 2014 Congressional candidate. Passionate about politics with emphasis on 1st and 2nd Amendments.

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