Bulls and bears

Alcoa’s split seems like the key driver of its price action this year. Meanwhile, market opinions on how Alcoa’s split will benefit its shareholders seem mixed. While long-term institutional investors have increased their stake in the company, bears have also increased their positions.

Why Both Bulls and Bears Are Betting on Alcoa

Long-term investors

Long-term investors are betting on value creation after Alcoa’s split. It’s no surprise, therefore, that out of Alcoa’s top ten institutional shareholders, eight have increased their exposure to Alcoa (AA) after the split announcement as can be seen in the chart above. One institutional investor has cut its stake marginally after the split announcement while one has kept it unchanged.

Furthermore, along with the existing set of investors, Alcoa has attracted fresh institutional interest. Elliott Management, which bought a stake in Alcoa last September, has further increased its stake at the end of 1Q16.

Long-term investors are betting on value creation after the split. Market players expect the value-added company, Arconic, will command a premium valuation multiple. References have been made to Berkshire Hathaway’s (BRK-B) acquisition of Precision Castparts.

Valuation

As Elliott Management said in its regulatory filings, Alcoa is “dramatically undervalued by the public market.” Elliott also added that Alcoa’s split would “create value substantially above the current share price.”

Meanwhile, along with institutional investors, there’s another set of market participants: short sellers who wish to gain from the stock’s downward price action. While Alcoa bulls (SSO) expect value creation after the split, short sellers are also eying their chances. We’ll discuss this more in the next part of the series.

You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Together, Alcoa and Ball (BLL) form ~4.6% of XLB’s portfolio.

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