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About one month ago, I wrote about the overvaluation in the rare earth stocks in this article. Even though many disagreed with the prediction that this sector was at or near a top, all of these stocks have dropped, some significantly in the past 4 weeks.

Now there are more signs this sector is looking topped out. Just a few days ago, an analyst from Goldman Sachs, Malcolm Southwood said he believes that the price surge is near a peak and that a surplus of rare earth supplies could be coming. You can read about those predictions here. That article also discusses how rare earth prices were only around $5 to $20 per kilogram before last year when China cut export quotas and that a number of new mines and companies are likely to begin exploring and producing rare earths in the coming years. In my article, I stated "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." You can read that and more here.

Since first writing about these stocks, the whole sector has trended lower, [Rare Earth Elements (NYSEMKT:REE) and Shen Zhou Mining and Resources (NYSEMKT:SHZ) have dropped the most, about 15% and 30% respectively, Avalon Rare Metals (NYSEMKT:AVL) is down about 14% and Molycorp (NYSE:MCP) is down about 4%] and a number of these stocks are now looking very sloppy in terms of price action, which is often another indicator of a top. I continue to believe that the easy money has been made in this sector and that many investors are unaware of the risks in some of these stocks due to operational and other business risks, along with the risks posed when buying stocks that are potentially reaching extreme levels of overvaluation. With evidence mounting that this sector has topped out, I would continue to avoid these stocks:

Molycorp, Inc. shares are trading around $70. MCP was founded in 2008, and is based in Colorado. The shares have traded in a range between $12.10 to $79.16 in the past 52 weeks. The 50 day moving average is $60.66. 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 selling millions of dollars worth of stock, which you can see here.

Avalon Rare Metals shares are trading at $8.48. 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 $8.21 and the 200 day moving average is $5.32. Earnings estimates for AVL are unavailable and the company has been losing money. The company describes itself as being "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 that in their most recent report here. These shares are trading just barely over the 50 day moving average and could be heading below that level soon.

Rare Element Resources, Ltd. shares are trading at $13.44. 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 $13.05 and the 200 day moving average is $10.26. Earnings estimates for REE are not available. This company has been losing money and you can read about their quarterly last report here. These shares were trading over $15 when I first wrote about this sector and have trended lower.

China Shen Zhou Mining and Resources shares are trading at $4.46. SHZ is based in China. The shares have traded in a range between 60 cents to $10.84 in the past 52 weeks. The 50 day moving average is $4.81 and the 200 day moving average is $3.87. Earnings estimates are unavailable for SHZ. This company has been losing money and it says it was a reverse takeover not long ago, which you can read about here. These shares were trading at $6.22 when I first wrote about this sector and have dropped substantially.

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.

Source: More Signs of a Top in the Rare Earth Stock Bubble