Today Alcoa Inc. (NYSE: AA) announced some restructuring plans that will trim down (SELL) some under-performing consumer packaging and automotive castings divisions. It will be taking some charges to the tune of $845 million as well, and intends to gear up for expansion into higher margin areas. Alcoa also said it raised cash by selling its 7% stake in Chalco, the Aluminum Corp China ADS (NYSE: ACH) and bringing in $2 billion dollars on what was initially a $200 million investment -- "A ten bagger."
It is this latter decision that is not smart, and without further explanation from management I have to question selling a winner. If you look at all of the things that Alcoa did in the last 10 years you will find that the Chalco investment was the smartest, and more importantly, the most profitable, thing it has done. For many years Alcoa stock has been adrift. Since it sold the stock it has only gone up further and as I write these words and look at the price now, ACH is trading up over 5% more to $75.70.
Since I first reported earlier in the year on ACH it is up over 300%, but even after the initial story buying in the low $20's I followed up with Chasing Value: Aluminum Co. of China driving me nuts. This is one of my best picks ever and although I know it will likely get trimmed down some when the fervor ends, I'm not selling. This is a long term hold. If Alcoa has other plans to participate in the Chinese aluminum market and compete with Chalco, I would like to know what they are because I do not see how it can match its growth with anything it is planning. As a matter of fact, since it got in before I did and knew more about the company, from the inside, than any of us, it should have been buying more. That would have helped the bottom line immensely.
I am coming to think there are times when some companies should operate more like Berkshire Hathaway (NYSE: BRK.A) and make these type of outside investments when they see such potential profits. Most investors do not care how they make an honest dollar and many do not even care about that. Therefore, while I think Alcoa is to be applauded for active pursuit of self improvement, I think selling ACH will prove to be a bad move.
To find potential opportunities and verify my track record read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He is on the advisory board of Internet start-up CircleBuilder.com.
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