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Rare earth stocks have been hugely popular for the past few months. I remember one day when it seemed like CNBC suddenly started talking about Molycorp (MCP) and other rare earth stocks so frequently that it made me wonder if they had a motive.
All of the stocks below have been in a solid uptrend recently. Some may have solid businesses and growth potential, but they have reached very overbought levels, and have high PE ratios. Some of these names are up about 6 to 10 times from their lows. What has happened in the past few months to make rare earths all of a sudden so much more talked about and so much more valuable than they were less than a year ago? These stocks are trading like they are the next Google (NASDAQ:GOOG) or Facebook, or Baidu (NASDAQ:BIDU), except they are not.
Technology can do amazing things, and I believe there will be ways in the future to make rare earths less rare through improved mining, new discoveries, and the use of alternative or possibly synthetic materials. With the type of valuations we are seeing in these companies, I won't be surprised if the world suddenly "discovers" a few more mines and start up companies that we can source "rare earths" from. Even if that were not the case, I don't think some investors understand the risks of investing in this sector and with companies that have, in some cases, a very limited operating history. Thanks to considerable coverage by CNBC, momentum traders piling in, and analysts touting these stocks, this is looking like one of the most over hyped sectors in the market today. One analyst raised the target price on Molycorp (MCP) to $90 this morning.
Any investor who wants to take the risk of owning this stock at about $72, to try to squeeze the last dime out of it to get $90 per share, deserves every penny for the risk I believe they are taking. The easy money has been made in this sector. Many of these companies are losing money, and have minimal revenues, especially when compared with their market caps.
Most of these shares have high PE ratios (if they have any earnings), are trading well above their 50 and 200 day moving averages and appear overbought. In particular, I am looking at the Relative Strength Index (RSI) levels, which can indicate overbought conditions. Stocks with an RSI rating around 70 or higher can signal that the shares are overbought and due for a correction. More about RSI and rare earths.
It's important to take profits when times are good and raise cash for the next big opportunity. These shares appear to be giving longs a chance to do just that. Here are the companies, which all have RSI levels around 70 or higher:
Molycorp, Inc. (MCP) shares are trading at $71.88. The RSI is about 73, which is at overbought levels. MCP was founded in 2008, and is based in Colorado. The shares have traded in a range between $12.10 to $72.74 in the past 52 weeks, in fact the shares hit a new high today. The 50 day moving average is $51.96. Since the shares are currently trading well over the 50 day moving averages, and close to the 52 week high, they could be due for a correction. Earnings estimates for MCP are just 38 cents for 2011, and $2.45 per share in 2012, so the current PE ratio is extremely high and the forward PE ratio on 2012 earnings is about 30. This company is very young and any missteps by management or other issues/risks that are inherent in mining could cost investors large sums. MCP insiders have been unloading shares worth many millions. I would be selling if I were them too!
Avalon Rare Metals (NYSEMKT:AVL) shares are trading at $9.65. The RSI is about 68, which is around overbought levels. AVL is based in Canada. The shares have traded in a range between $1.09 to $10.11 in the past 52 weeks. The 50 day moving average is $7.49 and the 200 day moving average is $4.67. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be headed for a big drop. Earnings estimates for AVL are unavailable and the company has been losing money. The company describes itself as "development stage" and says its "principal source of capital is from the issuance of common shares." It goes on to say: "In order to achieve its objectives, the Company expects it will be required to spend its existing working capital and raise additional funds as required." (You can read its most recent report here - pdf) That's not the kind of business model I want to invest in, especially when the stock is trading near record highs and with a market cap value of about $900 million.
Rare Element Resources, Ltd. (NYSEMKT:REE) shares are trading at $15.11. The RSI is about 64, which is near overbought levels. REE is based in Canada. The shares have traded in a range between $1.15 to $17.92 in the past 52 weeks. The 50 day moving average is $12.70 and the 200 day moving average is $9.11. Since the shares are currently trading well over the 50 and 200 day moving averages, and close to the 52 week high, they could be ready to drop lower. Earnings estimates for REE are not available. This company has been losing money. Read about its last quarterly report here.
China Shen Zhou Mining and Resources (NYSEMKT:SHZ) shares are trading at $6.22. The RSI is about 66, which is around overbought levels. SHZ is based in China. The shares have traded in a range of 60 cents to $10.84 in the past 52 weeks. The 50 day moving average is $5.34 and the 200 day moving average is $3.38. Since the shares are currently trading well over the 50 and 200 day moving averages, they could be ready to correct. Earnings estimates are unavailable for SHZ. This company has been losing money and says it was a reverse takeover not long ago.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.