Elliott Wave InternationalmyEWISocioniomics.Net
Home > Gold and Silver

What Role Do Earnings REALLY Play In the Future of Alcoa Inc?
Over the past year, there has been no consistent correlation between positive earnings-per-share in Alcoa Inc. AND rising stock prices. Consider this.

By Nico Isaac
Wed, 09 Jan 2013 16:45:00 ET
Add to Facebook Add to Twitter Email to a friend Printer Friendly

On Jan. 8, the financial media was astir as the first Dow Jones-listed company, Alcoa, reported its fourth-quarter 2012 earnings:  

·         Estimated earnings & revenue for Alcoa Inc. in Q4 of 2012: 6 cents per share on $5.6 billion 
·         Actual earnings & revenue for Alcoa Inc. in Q4 of 2012: 6 cents per share on $5.9 billion.
Bottom line: Alcoa hit its expected earnings per share on the nose. The question is: What does this mean for Alcoa?
Mainstream financial experts think the answer is simple: A stable or rising trend in earnings will fuel the upside of stock prices. End of story. Here, these Jan. 9 news items reinforce this narrative:
·         "Alcoa shares soar as investors cheer earnings report." (CNBC)
·         "The fundamentals are pretty positive. We will absolutely see a rebound in aluminum prices." (Bloomberg)
But what if we told you that earnings are NOT an accurate reflection of a company's future growth, but at best amount to a summary of past performance? Four years ago, in the Dec. 2009 Elliott Wave Finanical Forecast, our analysts offered this conclusion:
"Quarterly earnings reports announce a company's achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes."
The Dec. 2009 Elliott Wave Financial Forecast also showed that there is no consistent correlation between rising earnings and rising stock prices (or vice a versa). We used two memorable examples to drive this point home:
·         During the 1973-4 bear market the S&P 500 plummeted 50%, even as S&P earnings rose every quarter over that period.
·         In late 2000, the S&P 500 enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks.
Now let's bring our focus back to Alcoa. The chart below plots Alcoa's share prices over the past year alongside the actual vs. expected earnings-per-share (EPS) for all four quarters of 2012.
1st quarter: Jan-March
·         Actual EPS: .10 vs.
·         Expected EPS: -.4
·         Earnings deliver a positive, 350% surprise AND Alcoa shares DECLINE
2nd quarter: April-June
·         Actual EPS: .06 vs.
·         Expected EPS: .05
·         Earnings deliver a positive, 20% surprise AND Alcoa shares move SIDEWAYS
3rd quarter: July-Sept
·         Actual EPS: .03 vs.
·         Expected EPS: .00
·         Earnings deliver a positive surprise AND Alcoa shares RISE, then fall
4th quarter: Oct-Dec
·         Actual EPS: .06 vs.
·         Expected EPS: .06
·         Earnings meet target AND Alcoa shares RISE
Now let's take a look at another picture of Alcoa Inc. On Jan. 9 our Metals Specialty Service's daily analysis of aluminum presented this chart of Alcoa Inc. that showed the dominant Elliott wave pattern underway.  


Stay Ahead of the Trend in U.S. Stocks

EWI's Financial Forecast Service equips you to think, trade and invest independently from the crowd. Here's what you'll get, risk-free:
  • Short Term Update -- Intensive forecasts and analysis3x/week for U.S. stocks, gold, silver, bonds and the U.S. dollar.
  • Financial Forecast -- In-depth,intermediate-term perspective on U.S. stocks, gold, silver, bonds and the U.S. dollar.
  • Theorist -- Bob Prechter's monthly big-picture insights.
Put the Financial Forecast Service on your screen in minutes, risk-free>>

© 2016 Elliott Wave International
TRUSTe online privacy certification

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.