May 27 -- Macquarie Research said it expects aluminum prices to rise over the next several years after a 20 percent correction since its April-high, and raised the world's largest producer of the metal Alcoa Inc (AA.N: Quote) to "outperform" from "neutral."

Analyst Curt Woodworth noted that physical premiums for aluminium in Europe recently reached decade highs and premia in the U.S. and Japan are now at their highest levels since 2005 suggesting that the physical market remains very tight.

"We believe the aluminum market is more healthy than most investors realize as physical premiums continue to move higher and demand growth is accelerating," the analyst wrote in a note to clients.

Woodworth also raised his price target on Alcoa shares to $18 from $17, saying the stock is extremely undervalued and the recent selloff is overdone.

Alcoa stock has lost about 21 percent of its value since the company posted its fifth-straight quarterly loss on April 12.

Shares of the company rose as much as 3 percent to $11.68 in early trade, but later pared some gains to trade at $11.53 Wednesday morning on the New York Stock Exchange.