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Last Thursday, aluminum maker Century Aluminum (NASDAQ: CENX) reported a small earnings miss for its fiscal third quarter, coming in at $0.22 per share, a penny short of analyst estimates. Wall Street was in a forgiving mood, however, and by the close of trading Friday, Century stock was down only a few pennies below where it had closed Thursday.
But that didn't last long.
On Monday, the long-delayed reaction to the earnings miss arrived, when a downgrade from investment banker J.P. Morgan sparked an 11.1% sell-off in Century stock.
What was it that spooked J.P. Morgan and the rest of Wall Street? As the analyst explained, higher alumina prices are likely to create a "significant margin squeeze" for Century. Although that squeeze has not yet arrived in full measure, J.P. Morgan expects that it will by first -quarter 2018. Attempting to beat the rush, the analyst is heading for the exits, downgrading Century Aluminum stock to neutral and cutting its price target by 34% -- to $14.50 per share.
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J.P. Morgan may be right about Century Aluminum, or it may be wrong. But here's the thing: Shares of Century Aluminum have more than doubled over the past year already. However, Century Aluminum remains unprofitable -- and J.P. Morgan's prediction seems to suggest that it will become even more unprofitable next year.
Investors don't seem interested in waiting around to find out how bad things could get if J.P. Morgan is right. Given how much Century Aluminum shareholders have already gained from owning the stock over the past year, and how much they have to potentially lose if J.P. Morgan's fears come to fruition, I'm not sure I'd be waiting around to find out if the analyst is right, either.
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