Molycorp, Inc. (MCP) shares were surging ever higher in 2011, and that momentum and investor optimism took the stock to over $70 per share for a while. At that time, many investors seemed to believe that rare earth minerals were going to be the next big thing, but clearly that level of optimism was excessive. More recently, many investors have become decidedly bearish by shorting the stock, and many others have sold out of pure frustration. However, as most investors realize, timing is everything when it comes to investing, and that seems particularly true when investing in Molycorp, Inc. For a number of reasons, it could now be the right time to buy this stock, here's why:
1) Molycorp shares have a 52-week low of $4.51, and a 52-week high of $11.81. With the stock now trading just below $5, it is close to the lows. Investors who bought this stock when it was trading for $30, $40, $50, $60 and even over $70 in 2011 have losses, and investors who bought it even this year when it was trading at more than double the current price, also have losses. That makes this stock an ideal candidate for tax-loss selling which happens in the last few weeks of each year as investors sell "losers" in order to offset taxes on their winning trades. By taking a look at the chart below, it clearly shows a stock that has traded (for the most part) in a range between $5 to $8 per share from April to October. However, more recently (in the peak tax-loss selling months of November and December), this stock has been under obvious pressure which has pushed it just below $5, and kept it from making some of the big rallies it has made multiple times, before tax-loss selling season began. However, that could change since tax-loss selling pressure is about to end in just a few days. The end of tax-loss selling pressure could greatly impact Molycorp shares and make it an ideal candidate for a "January Effect Rally".
2) When looking for stocks that could rebound significantly when tax-loss selling pressure ends, it can be even more rewarding to consider ones that have an above-average level of short interest. According to Shortsqueeze.com, there are about 59 million shares short in Molycorp. This is significant because the average trading volume is about 3.6 million shares, which means the short interest is equivalent to around 16 days worth of trading volume. It is also significant because the short position represents nearly 32% of the float. Now there are two more points to consider: 1) If the stock can trade for nearly $5 per share in the midst of weeks of (probably very heavy) tax-loss selling pressure, it stands to reason that it will trade for more once this selling pressure ends on December 31. 2) Many shorts have significant gains in Molycorp this year and it also stands to reason that it could be desirable (but probably not smart) for them to wait until January to cover since this will allow them to defer taxes on the gains for an additional year. For these reasons, Molycorp shares could be poised for big gains into January since the end of tax-loss selling should help the stock rebound, and in turn, this sudden strength could cause some shorts to cover. Finally, buying pressure from shorts who were waiting until January to cover in order to defer taxes could also lead to a short-covering rally in this stock. Again, timing is everything, and these reasons lead me to believe that the time is right to buy now.
Now let's look at some longer-term reasons to consider buying Molycorp: This company is one of the world's largest rare earth producers and it is based in Mountain Pass, California. Since Molycorp and "Project Phoenix" are located in California, this company does not have the type of geopolitical risks that other mining companies are exposed to. This reduces risks for investors and it makes Molycorp well-positioned to supply the U.S. and the world with rare earth minerals which are used in products ranging from televisions, mobile phones, magnets, lighting, catalytic converters for cars, and more. The demand for rare earths is poised to grow over time, especially as the global economy improves and as the population expands.
Molycorp has made significant investments to develop its rare earth mines and the company is expected to see rapid revenue growth. Analysts expect revenues to surge from about $579 million in 2013, to around $865 million in 2014. That is a jump of roughly 50% and strong growth rates could continue for years to come as production increases and prices improve. This growth is what should help to turn the corner in terms of profits as analysts expect the company to lose about $1.09 in 2013, but see losses of only 27 cents for 2014. While losses are a potential downside risk for investors to consider, the rapid revenue growth mitigates a lot of this risk. Furthermore, the company is expected to be cash flow positive as soon as sometime in 2014. Another potential downside risk to consider is the pricing for rare earths. If the global economy were to experience another recession, the demand could drop and impact revenues and profit margin for Molycorp. However, the economy does not appear to be at risk of recession now, and demand for the type of tech and other products that use rare earths seems likely to grow.
In October, analysts at Cowen and Company raised the price target on this stock to $8.60. With the stock now trading for nearly $5 per share, this would imply potential gains of around 80%. Analysts usually set price targets for the next 12 months, so if that target is reached it would be quite a strong gain for investors. However, even that could be too conservative as Jason Bond makes a solid case for Molycorp shares to be a multi-bagger in about 18 months in this article. In the short term, I believe this stock is poised for a major rebound in January as tax-loss selling ends and as shorts cover. These forces could push the stock back up towards $5.96 which is the 200-day moving average.
Molycorp is clearly a compelling investment as a short-term rebound candidate and it has long-term growth potential. Some industry watchers have even suggested that Molycorp could be an attractive takeover target for a global manufacturing giant like Nissan (OTCPK:NSANY) or Siemens (SI), as this would secure access to the rare earths used by these companies. At this time, I am focused on stocks like Molycorp which have significant upside potential in a January Effect rally. To read about another metals mining (molybdenum) stock trading for $1, that also has January Effect rally in the short term and multi-bagger potential in the longer term, you can read more on that in this article.
Here are some key points for Molycorp, Inc.
Current share price: $4.85
The 52 week range is $4.51 to $11.81
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Disclosure: I am long MCP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.