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A Long and a Short

12/01/2006 12:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Proving once again that investing offers something for everyone, economic guru Mark Skousen provides his subscribers with two unique opportunities: A high-yielding far eastern business suitable for long-term investors and a short-selling opportunity for traders.

"Aluminum Corp of China (ACH NYSE), better known as Chalco, is China's largest aluminum producer, making 2.26 million tons of alumina in the third quarter, up 27% from the same period a year ago. Alumina is the key raw material used to produce aluminum, a corrosion-resistant metal lighter than steel that is high in electrical conductivity. It is widely used in applications such as construction, power, packaging, and autos.

"However, commodity prices have cooled off lately and that retreat has begun to affect the company's profitability. But Chalco is mitigating the negative impact by snapping up smelters in China to expand its output.

"The market, however, has so far been unimpressed. Since late spring, the stock price of Chalco has dropped by more than one third, creating quite a bargain. Chalco not only sells for eight times prospective earnings but also trades at just 35% of sales. That's awfully cheap, especially when you consider that Chalco has operating margins of 31%, a healthy 29% return on equity and a current yield of 17.8%.

"The company's fortunes are closely tied to China's booming demand for aluminum products. But there's no good reason to think that demand--or China's economy--will cool off any time soon. So pick up Aluminum Corp of China at market with a protective stop at $14. There are no options on this one to consider.

"Recently, technology outsourcer Affiliated Computer Services (ACS NYSE) fell 7% in a single session and finished the week lower still. We began shorting ACS four months ago. Competition is fierce. Sales are anemic. And recent preliminary results fell short of expectations.

"Preliminary results are all the company is providing due its internal probe into the possible back-dating of stock options. The outcome is likely to affect final results. The company's financial reporting (back to 1994) is under investigation by the Securities and Exchange Commission (SEC).

"Wall Street is losing patience. Since I began recommending this short, the stock has been downgraded by Bear Stearns, Goldman Sachs and RBC Capital Markets, and recently by Stifel Nicolaus.

"All this negative sentiment is not just about the SEC investigation. Profit margins and return on equity at ACS are just 7%. Analysts are still reducing earnings estimates for the year ahead. The stock also is technically weak, trading below both its 50- and 200-day moving averages. Continue to hold or add to your short position in ACS."

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