Alcoa Provides a Nice Start to Earnings Season

07/12/2016 11:40 am EST

Focus: STRATEGIES

Michael Berger

President & Founder, Technical420.com

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The markets are trading higher after earnings season got off to better-than-expected start following a positive report from a company whose results tend to serve as a barometer for the market says Michael Berger, Associate Editor of MoneyShow.com.

Earnings season got off to a nice start during after-hours trading yesterday as Alcoa (AA) reported second-quarter earnings and revenue that beat Wall Street expectations. Alcoa's results are often used as a barometer of the economy because its products are used in so many industries.

Although Alcoa beat expectations for the period, profit fell approximately 4% when compared to the same period last year. The company has been affected by falling aluminum prices and Alcoa continues to focus on shrinking the size of this business.

Reconfirmed Plans to Split this Year

Alcoa reconfirmed its plans to split this year and said that everything is on schedule. Alcoa will create a new public company that will make and sell specialty lightweight products for aerospace, autos and other industries.

The division that Alcoa plans to spin off as a new public company later this year saw operating income increase by 3% during the period. That side will be called, Arconic.

Slowing Growth for Now…

Alcoa said the aerospace market saw growth slow during the first half of 2016. The company expects to see growth pick up during the back half of 2016 as demand for alloys used in jet engines is expected to increase.

Alcoa reported 47% lower operating income (after taxes) from its metals business and this reflected lower metals prices and the closure, sale or idling of about 40% of Alcoa's smelting capacity in the last several years.

CEO Klaus Kleinfeld said that when prices rise, Alcoa will see immediate improvement in profit because it has cut costs sharply.

Market to Reach Too Favorably?

AA has seen its share price bounce more than 3% higher this morning as the market responded favorably to its second quarter results.

Although we expect to see Alcoa’s results help drive the market higher in the near-term, we would not get too comfortable with the recent highs.

We continue to view gold and gold mining stocks as attractive investments as central banks around the work prepare to meet and discuss ways to stimulate growth in a choppy global growth environment. Gold continues to benefit from low interest rates, quantitative easing and economic uncertainty, which are three themes that we believe are present in today’s markets.

Top Stocks and Funds 

The price of gold has increased more than 25% this year and we continue to see further upside to its current price as the precious metal has number of catalysts over the next twelve months. For this reason, we continue to view funds levered to the price of gold and gold miners as attract investments.

On June 10th, we recommended SPDR Gold Trust (GLD), Barrick Gold Corporation (ABX), NovaGold Resources Inc. (NG), Direxion Daily Gold Miners Bull 3X ETF (NUGT), and VanEck Vectors Gold Miners ETF (GDX).

Since then, the stocks have rallied 6.6%, 12.5%, 16.4%, 50.2%, and 16.2%, respectively.

Although we remain favorable on these stocks, we would be cautious with NUGT at current levels as the shares are up approximately 600% this year. We are replacing NUGT with McEwen Mining Inc. (MUX), a company that produces, and sells precious metals in Argentina, Mexico, and the United States. MUX is up approximately 350% this year.

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