Alcoa Dons Aluminum Crown

This metal company is held in high esteem by two guru strategies.
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This column was originally published on RealMoney on Aug. 2 at 11:30 a.m. EDT. It's being republished as a bonus for readers.

Aluminum is one of those products, like steel and copper, that just doesn't get much respect from consumers. We wrap our food in aluminum foil, drive our cars with their aluminum panels and drink our beer and sodas from aluminum cans, but how many of us give much thought to this truly versatile material?

You can start paying your respects to aluminum by paying attention to the king of the aluminum marketplace,


(AA) - Get Report


Aluminum comes from bauxite, and Alcoa controls about 24% of the world's bauxite reserves. Alcoa is, in fact, the world's largest aluminum producer (and is also the owner of Reynolds aluminum foil).

As with other metals, demand for aluminum is now strong. The future looks shiny, and the stock, currently priced around $30, is decidedly reasonable based on the company's earnings growth, financial strength, yield and other factors, as discussed below.

Let's see how two of the guru strategies I follow view this industrial giant.

The James P. O'Shaughnessy Strategy

The strategy I base on the writings of James P. O'Shaughnessy is a strategy that seeks growth at a reasonable price, or GARP. It looks for large companies, and Alcoa is certainly large, with a market cap of more than $25 billion. A company also needs strong cash flow, which is defined as greater than the market's mean. Well, the market's mean is $2.20 cash flow per share, and Alcoa's is $2.87.

The total number of shares outstanding should also be in excess of the market's average; this is true for Alcoa. And the company's trailing 12 months sales should be 1.5 times greater than the comparable number for the market, which is also true for Alcoa.

The final step in the O'Shaughnessy analysis is selecting the 50 companies that have the highest dividend yield from those companies that have passed the previous four criteria. Alcoa, with a dividend yield of 2.02%, is one of the 50 companies to satisfy this last criterion.

The Peter Lynch Strategy

Alcoa's considered an aluminum heavyweight not only under the O'Shaughnessy strategy but also under another GARP strategy I base on the writings of Peter Lynch. Alcoa is considered a "true stalwart" because its earnings have grown about 12%, which is in this strategy's "true stalwart" growth range of 10% to 19%.

The strategy prefers inventories to increase at a rate equal to or less than sales. Alcoa's inventories inched up just above the rate sales did, but the increase was small enough not to be an issue.

The company's yield-adjusted P/E/G ratio (price-to-earnings ratio relative to earnings growth) is just at the upper limit allowed -- 1.00. This, by the way, is based on the average of the three-, four- and five-year historical earnings-per-share growth rates.

The EPS for a stalwart company must be positive, which is true for Alcoa. And while the company's debt-to-equity ratio is not great, it's acceptable.

Alcoa is the largest player in its industry. It's well-managed. And it's in a market with strong demand with a stock that's reasonably priced. Two guru strategies like this company, and so do I.

Buy some shares of Alcoa, and you may never again take a soda can for granted.

At the time of publication, Reese had no position in the stock mentioned, although holdings can change at any time.

John P. Reese is founder and CEO of, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best selling book,

The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback.

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