Why Rare Earth Stocks May Continue To Fall

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Includes: AVL, MCPIQ, REE, REMX, SHZ
by: Rougemont

Just about all stocks have been dropping, but one of the hardest-hit sectors has been the rare earth stocks. This sector became over-hyped earlier this year, and that has only exacerbated the recent fall. Some of these stocks rose over 500% in just a few months, so it was not hard to see that these stocks may have run too far too fast. Part of the run in this sector was due to news that China would limit rare earth exports and that caused prices to rise and investors to pile into these stocks.

However, those high prices and supply risks caused many companies to consider finding alternatives and solutions. A recent Barrons.com article states "Companies are finding ways to supplant rare earth in their products, Bloomberg says. Toyota, for instance, is planning to use an induction motor in its vehicles, which would reduce its need for rare earth magnets. Other companies are likewise finding alternatives." The article suggests that the rare earth stocks may have additional downside risk due to the interest in alternative solutions for rare earth elements.

Back in April I suggested that the rare earth stocks were over-hyped and should be sold. I had plenty of negative comments on the article at that time. With the huge drop in these names over the past few months, they could be closer to a bottom, but I would like to see major insider buying. Here are some names to watch for signs of a bottom in this sector:

Molycorp, Inc. (MCP) shares are trading around $30.12. MCP was founded in 2008, and is based in Colorado. The shares have traded in a range between $26.02 to $79.16 in the past 52 weeks. The 50-day moving average is $51.38 and the 200-day moving average is $54.57. MCP estimates are at $1.78 for 2011 and $3.48 for 2012. MCP insiders have been selling millions of dollars worth of stock in 2011. With all the money some of these insider received from selling shares at much higher prices, it might make sense to wait to see significant insider buying before considering this stock.

Avalon Rare Metals (NYSEMKT:AVL) shares are trading at $2.42. AVL is based in Canada. The shares have traded in a range between $2.38 to $10.11 in the past 52 weeks. The 50-day moving average is $4.23 and the 200-day moving average is $6.39. Earnings estimates for AVL are unavailable, and the company has been losing money. This stock is about 70% below the 52-week high, but I still see little reason to risk an investment here, although it might make sense for a trade at some point.

Rare Element Resources, Ltd. (NYSEMKT:REE) shares are trading at $4.41. REE is based in Canada. The shares have traded in a range between $4.37 to $17.92 in the past 52 weeks. The 50-day moving average is $8.34 and the 200-day moving average is $11.39. Earnings estimates for REE are not available. This stock has recently seen some insider buying. This could mean the stock is getting close to a bottom, but I would want to see the next financial report before following insiders here.

China Shen Zhou Mining and Resources (NYSEMKT:SHZ) shares are trading at $1.19. SHZ is based in China. The shares have traded in a range between 98 cents to $10.84 in the past 52 weeks. The 50-day moving average is $2.37 and the 200-day moving average is $4.33. Earnings estimates are unavailable for SHZ. With Chinese stocks very out of favor for many investors, I see no reason to even try to find the bottom here.

MV Rare Earth/Strategic Metals (NYSEARCA:REMX) is an exchange-traded fund with holdings including stocks like Molycorp. The shares have traded in a range between $14.41 to $28.91 in the past 52 weeks. The 50-day moving average is $20.47 and the 200-day moving average is $23.92. This is the safest way to play this sector because it offers diversification. However, even with diversification, this ETF is trading at about half its 52-week high.

Data is sourced from Yahoo Finance and Stockcharts.com.

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

Disclaimer: 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.