What Is The Best Aluminum Stock? (KALU, AA, ACH, JJU, CENX)

When traders think aluminum, often the first stock that comes to mind is Alcoa Inc.

; maybe this is because it is the most well known aluminum stock in America or maybe it just receives too much fanfare given that it is the first major stock to report earnings at the beginning of each quarter. This begs the question, “Is Alcoa the best way to play a rally in aluminum?” When looking for the best way to play any trend, it is best to weigh the relative performance of stocks versus a benchmark. In the case of aluminum, this is made easier because traders can weigh the performance of aluminum stocks versus the performance of the actual metal. While in the old days traders used to use the spot price of metal futures, we can now use metal ETFs, which are more commonly traded today to execute long or short theses on the respective metal. In the case of aluminum, traders now have the iPath Dow Jones-UBS Aluminum Subindex ETN

. When you rate the relative performance of the four most popular aluminum names (done by dividing the price of the respective stocks by the price of the JJU) over one year you will see the following returns: • Alcoa Inc.

: AA/JJU: -15% • Aluminum Corp of China Ltd.

: ACH/JJU: -28% • Kaiser Aluminum Corp.

: KALU/JJU: +9% • Century Aluminum Co.

: CENX/JJU: -10% While these one year returns gives stock pickers an interesting take on the subject, let’s see how a longer-term chart alters the numbers. Here are the relative performance numbers for the four most popular aluminum companies over two and a half years (since the JJU was established). • Alcoa Inc.

: AA/JJU: -48% • Aluminum Corp of China Ltd.

: ACH/JJU: +39% • Kaiser Aluminum Corp.

: KALU/JJU: +18% • Century Aluminum Co.

: CENX/JJU: -69% As you can see, Alcoa and Century Aluminum have been historical underperformers versus the spot price, whereas Kaiser Aluminum has consistently outperformed the spot price. The performance for Aluminum Corp. of China has been decidedly mixed. Interesting to note, if you take the iPath Dow Jones-UBS Aluminum Subindex ETN and divide it by the Powershares DB U.S. Dollar Index Bull Fund

, which tracks a basket of long U.S. Dollar Forex positions (replicating the $.DXY_F), you see the following performance: • JJU/UUP: 12-months: -5% • JJU/UUP: 36-months: -48% These two previous metrics indicate that holding a long U.S. Dollar position has been more profitable than holding an aluminum position over the medium-term, though much of that outperformance is due to the sharp retracement in aluminum futures over the past two and a half years. Looking at an 11-year chart of aluminum, you will see that the 2006 to mid-2008 timeframe (spot price over $3000 per ton) was a period of outsized prices given the mean spot price of $1725 per ton. For reference, $1,200 per ton is serious long-term support and $2,000 per ton is a large pivot point. Spot prices are currently running at $2,093 per ton; the front month future is trading at $2,102 per ton. That’s a lot of information, but…how do you put it to good use? The moral of the story here is that the spot price of aluminum is at a key pivot point, with prices looking to make a large move either way. Given that Kaiser Aluminum’s stock has been a marked outperformer in both falling and rising aluminum markets, if you are in the market for an aluminum play, for both the short-term and long-term, this is your pony. With that said, given the correlation between aluminum prices and the U.S. Dollar (remember that the .DXY has outperformed aluminum relative to the two’s positive correlation) you should consider hedging your position in KALU with a long UUP position as well. Putting on the above trade on a one-to-one basis 12-months ago would put you positive by 6.5% over the period in a completely hedged manner. That bests the S&P 500

, which is higher by 5.6% over the past 12-months and unhedged. For more great research like this, as well as how to play them through options…please visit

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