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We’ve been bombarded with Black Friday deals for weeks; what used to be a one-day-only, in-store event has turned into a month-long celebration of “the best deals of the year,” and we’d feel pretty foolish for not jumping on that 70-inch television, AirPods Max headphones, or Ninja 14-piece knife set we’ve been eyeing since July.
So, in the spirit of the week, I thought I’d revisit a couple of cheap stocks I’ve been watching throughout 2023.
Both are trading within a few dollars of their 52-week lows, but this does not diminish the tremendous potential they possess.
Here’s what I mean…
Cheap Stock No. 1: Corning
For more than 170 years, the Corning Inc. (GLW) name has been synonymous with best-of-breed glass products. It has continuously innovated and set the industry standard for excellence.
Today, the company operates six different business segments – each of which is beginning to benefit from powerful tailwinds.
Those six segments are…
- Optical Communications – accounting for 34% of Corning’s 2022 sales and 37% of its net income.
- Display Technologies – accounting for 22% of sales and 44% of net income.
- Specialty Materials – accounting for 14% of sales and 19% of net income.
- Environmental Technologies – accounting for 11% of sales and 16% of net income.
- Life Sciences – accounting for 8% of sales and 9% of net income.
- Hemlock and Emerging Growth Businesses – accounting for 11% of sales and 2% of net income.
The worldwide 5G buildout tops the list of tailwinds that are benefiting Corning’s largest segment, Optical Communications. That’s the one that provides optical fiber and related connectivity solutions to telcos, data centers, and other enterprises.
As the global 5G build-out proceeds, so too will demand for Corning’s fiber-optic cable and components. This substantial source of new demand could become shockingly large.
Looking further down the road, I expect the coming decade to reward Corning with a level of profitability that few investors anticipate today. As a small bonus, the stock pays an annual dividend yield of 4.2%.
Let’s give the final word to Corning CEO Wendell Weeks…
When it comes to the critical components that enable high technology systems in multiple markets that we serve, the bar just keeps getting higher. This leads to a world where precision glass and ceramics win, and we have been winning…
Corning is one of the world’s most proficient innovators in materials science. We combine our unparalleled expertise in glass science, ceramic science, and optical physics with our proprietary manufacturing and engineering platforms to develop category-defining products that transform industries and enhance lives.
Cheap Stock No. 2: Alcoa
Because of widespread anxiety about the near-term risk of recession, many “battery metal” stocks have plummeted 50% or more.
Therefore, at their current depressed valuations, some of these stocks are pricing in so much doom that they fail to reflect any of the long-term boom for battery metals.
One of those stocks is Alcoa Corp. (AA), the largest U.S.-based aluminum producer.
Aluminum does not receive the same high-profile attention that other battery metals do, but the solar industry is a prodigious consumer of aluminum, and so is the EV industry.
Certainly, Alcoa’s stock might fall further. But the current valuation is cheap enough that the stock could deliver outsized gains over the next several months, especially if aluminum demand ramps up more quickly and powerfully than recession-phobic investors currently expect.
Plus, the stock might also catch a boost if the White House enacts a ban on Russian aluminum. That story surfaced in early February 2023.
Trends in the aluminum market are similar to trends in the copper market, which is good news for Alcoa, based in Pittsburgh.
But first the bad news…
After spiking to $4,000 a tonne during the early days of the Ukrainian invasion, the aluminum price tumbled about 40%, which caused Alcoa’s share price to drop as much as 65%.
Incessant chatter about recession and demand destruction is weighing on the price of aluminum. But as with copper, the long-term outlook for the silvery metal is excellent.
A new report from the London-based International Aluminium Institute finds that global aluminum demand will jump about 40% by 2030 – and cleantech industries will power most of that growth.
As a result, the report states that aluminum producers will need to ramp up their production from 86 million metric tons in 2020 to 120 metric tons by 2030.
According to the research firm, Wood Mackenzie, solar industry demand for aluminum could increase from just under 3% of total world consumption to nearly 13% by 2040.
In the EV industry, aluminum does not play a significant electrification role, but the body and chassis of each Tesla Model S contains about 410 pounds of aluminum!
That’s no accident. Because aluminum is so much lighter than steel, EV manufacturers covet the metal. An aluminum vehicle can travel much farther on a single charge than a steel vehicle can.
For this reason, many EV manufacturers are ramping up their aluminum consumption. In fact, aluminum is the fastest-growing material in the automotive market.
In 2021, the auto industry accounted for about 20% of global aluminum demand. Within that slice of the pie, the EV portion was only about 2%.
But that percentage is certain to grow rapidly over the coming decade. Wood Mackenzie expects aluminum demand for EVs to hit 2.4 million tonnes by 2025, and then quadruple to nearly 10 million tonnes by 2040. At that point, EV demand for aluminum would total about 12% of the global total.
Obviously, these forecasts are merely guesses, but the trend is clear. EV demand for aluminum is ramping higher. And that’s just one source of demand from the cleantech sector.
According to the IAI, renewable energy needs will create demand for aluminum to replace existing copper cabling for power distribution. In total, the electric sector will require an additional 5.2 million metric tons by 2030, according to the group.
You get the idea.
Interestingly, despite all the talk about slack demand for aluminum, global stockpiles of the metal are near historic lows… just like they are in the copper market!
The combined aluminum inventories of the major commodity exchanges in London, Shanghai, and New York have fallen to their lowest levels in more than 20 years.
But despite the strong supply-demand dynamics in the aluminum market, the Alcoa share price is reflecting all doom and no boom. The stock changes hands for less than four times earnings.
From this low valuation, Alcoa offers substantial upside potential – both over the next few months and over the next few years.
Regards,
Eric Fry
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