Published: September 21, 2010

September has been a wonderful month for stocks. The S&P 500 Index, for example, has risen in 10 of the past 13 sessions, rebounding to levels seen last May, before the bears took the reins. Shares are rising on expectations that we're increasingly likely to avoid a double-dip recession, and with a little momentum on the jobs front (and eventually the housing front), animal spirits could conspire to help push economic growth rates back up to respectable levels by the second half of next year or 2012. And if history is any guide, that economic strength could feed on itself, and set the stage for even more robust growth in 2013 and 2014.

Of course, serious problems remain and Washington will have to find a way to truly lead rather than follow if it is to restore confidence. But there are simply too many positives to ignore, including: cash-rich balance sheets, still-solid profit margins, newly-expanding trade opportunities in Latin America and Asia thanks to growth in key countries in those regions, and with a little luck and finesse, a slightly weaker dollar that could materially boost U.S. exports.

In that context, investors need to make sure they have exposure to companies that stand to benefit from rising economic fortunes in developed and emerging markets. Yet many blue chips have moved up off of their lows and already discount an eventually brightening outlook. But one Dow component, although struggling right now and trading on the cheap, should represent massive upside once business improves. I'm talking about Alcoa (NYSE: AA), the world's largest aluminum producer. It's much reviled, but wheezing back to life.

My colleague Paul Rolfes recently laid out a logical bear case for Alcoa. [See: This Stock Could Disappear from the Dow] And he's right. The company's dividend is paltry, and most analysts rate the stock as a "hold." But it's important to know that analysts rate stocks on current operating trends, and have a lousy track record of looking out a year or two. Even when they turn bullish and raise their rating, they only boost their price target by a small amount, and then keep raising it again and again. That's how I believe Alcoa will play out, either later this year or in the first half of 2011. Here's why…

Darkest before the dawn
Massive aluminum smelters cost huge sums of money to build and operate. So when demand slumps, those heavy costs can eat up any potential profit. Alcoa's 2009 results were nothing short of dismal. Sales fell -31% and operating margins, which had hit 16% just two years earlier, fell to 8%. Since then, management has had to cut costs wherever possible (37,000 jobs have been shed since 2008) while awaiting a rebound in sales. That process has just begun.

Alcoa lost nearly $400 million last December and lost another $100 million in the March, 2010 quarter, but was able to finally move back into the black in June, generating operating profits of about $230 million. The volume of aluminum produced rose +4% sequentially. Business still stinks, but less so than before.

More than likely, results will remain subpar (relative to historical peaks) for at least another year or two. But my favorite investor maxim clearly applies here: "The market always looks ahead." Alcoa's stock is now trading on anticipated 2011 results, but come this winter, they will start to trade on anticipated 2012 results.