Alcoa lags the rest of the Dow signaling global economic weakness

Since 1 November 2011 the Dow Jones Industrial Average has risen by 31.19%. Over the same period however, Alcoa, the world’s leading producer of aluminium, has fallen by 15.98%. With the Dow making new all-time highs, the question is, why is one of its oldest components still trading at the same level it was in 1989?

The chart below shows Alcoa’s price action over the past 2 years alongside that of the Dow Jones Industrial Average. Starting late last year the Dow began a dramatic rise, however Alcoa continued to drift lower.

A 2 year (daily) chart of Alcoa Inc (NYSE:AA) (Click on the chart for a larger version)

A 2 year (daily) chart of Alcoa Inc (NYSE:AA) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Alcoa produces aluminium which is used by the aerospace, automotive, packaging, building and construction, commercial transportation, and industrial industries. Aluminium is one of the largest consumed base metals in the world, which, along with copper, makes it a good barometer of global economic health.

However, thanks to slowing global demand and a global supply glut the price has been declining steadily since April 2011, something which has squeezed profit margins and impacted the share price of many producers. Alcoa’s twelve month trailing profit margin is now just 1.05%, while return on Equity is just 1.36%.

Another reason for Alcoa’s poor performance relative to the rest of the Dow, is that institutional investors are likely opting to invest only in the safest blue chip companies, and the cyclical nature of Alcoa’s business together with its beta of 2.10 has made it a company to avoid.

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