Stock Picks: AA Up; WLP Down

Alcoa (AA) kicked off the third-quarter earnings season on Thursday by beating expectations with a surprise profit. Shares for the Pittsburgh-headquartered aluminum maker, whose quarterly results are closely watched by Wall Street, were up 3.7% in midmorning trading.

The company reported a profit of nine cents a share after the market close Wednesday, down from 33 cents a share in the year ago quarter. Wall Street analysts, on average, expected a loss of nine cents a share. Alcoa CEO Klaus Kleinfeld attributed the performance boost to a combination of cost cutting and rising commodity prices. In a Wednesday evening conference call, Kleinfeld also said the start of a global recovery would create greater need for its products: "Second half of the year is clearly better than the first half in many industries and also many regions."

CreditSights analyst Andrew Brady wrote Wednesday that the upside surprise reflected progress from the industrial pillar and Dow component—despite the fact that that all of Alcoa’s business segments saw year-over-year decreases.

Tony Rizzuto, an analyst at Dahlman Rose, warned that the demand outlook would likely mirror the pace of the economic recovery, and would be uneven. "While we have witnessed a brief uptick in automotive sales in the domestic market, driven by the cash for clunkers program, the most recent sales figures indicate that demand has fallen to a low level after the conclusion of this program," he wrote. "Further, we remain concerned about the commercial building and construction market and the industrial turbine market. We are positive on the long-term outlook for these markets, but over the near-term, they may face further headwinds."

Bottom Line: Hold
Aluminum making isn't sexy or exciting, but it's an industrial benchmark that can be used to gauge the improvement in the global economy. Buying this stock as it ascends while the durability of recovery remains in question could lead to some medium-term disappointment.

The Byzantine political twists of health-care reform are rippling into the health sector.

The Joint Committee on Taxation on Wednesday released a report of the fees that will affect health care companies under the current compromise version of the Senate Finance Committee's bill. Sen. Max Baucus (D-Mont.), who has shepherded the $839 billion legislation, said industry fees will not be tax deductible, raising the total cost to drug, medical device and insurance companies by about 31%. That prompted collective investor wince and a Thursday selloff.

Indianapolis-headquartered insurer Wellpoint (WLP) was hardest hit, with shares dropping 6.9% in midday trading. UnitedHeath Group (UNG) and Humana (HUM) were also down.

"This has two important implications," ISI Group policy analysts Tom Gallagher and Andy Laperriere wrote Wednesday. One is that insurers would have to pay as much as 25% more than what they expected to pay before the deduction was yanked. That number is less than what medical device makers will pay, but a necessity in the sausage making aspects of major legislation, they wrote. "Second, it probably closes any budget hole the committee created during its markup of the bill."

Bottom Line: Hold
This sector will bob like a cork on the seas of a political process, and it will be a while before fundamentals regain their influence on stock prices.