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Buying straw hats - AWC

Nearly every investor has heard the old markets saying; “Buy straw hats in winter”. Like many principles of successful investing it is easy to say, and much harder to do.

The best time to buy a stock, or a market, is when it’s at its lows. The difficulty is that the lows occur when fear is at its highest. As human beings our instincts are to run with the pack, not against it. Fear of financial loss and embarrassment are key factors that prevent investors from acting at the potentially most lucrative times.

Investors can help steel themselves to buy at the best times in a number of ways. One is to have a watch list of highly desirable stocks in anticipation of a share price fall. Alumina Ltd is a stock on my watch list, and has suffered a significant drop as aluminium prices declined from a peak earlier this year. Ding ding.

The production of aluminium is a multi-stage process. Bauxite is mined, refined into alumina, and then smelted into aluminium. AWC is involved in every step, through its 40% stake in a joint venture with Alcoa in the US. Aluminium is a key industrial metal, but the highly power intensive production process meant the industry was shunned as part of the shift away from fossil fuels. In my view the world is underinvested.

That’s why AWC is looking good to me at current share prices. While wary of dividend traps, if AWC merely matches its last two dividends in the coming year it will yield around 15% (including franking).  Even a halving of dividends will still result in a return better than 7%. The chart shows a support level at $2.17, just below current prices. The recent down draft in base metals and concerns about global growth generally are the fear factors weighing on the price. Despite the risk of looking foolish, in my opinion it’s time to step up to the plate in AWC.

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