Seeking Alpha
Profile| Send Message| ()  

Rare earth stocks were booming when companies like Molycorp (MCP) went public in 2010, but the hype and expectations from some investors did not meet with reality and the sector has gone from being super-hot to extremely depressing. Investors were enticed into this sector because rare earths are used in a number of products like consumer electronics, hybrid cars, and other fast-growth areas.

Investors who have tried to buy the dips in stocks like Molycorp and other rare earth sector stocks like Avalon Rare Metals (AVL), have often ended up "catching a falling knife". After a drop from the 52-week high of about $63, the shares of Molycorp seemed to stabilize around the $20 level, but that changed after the stock lost nearly 30% in a single day, following the release of earnings. The company posted a loss of $67.6 million or 71 cents per share for the last quarter. This did not compare favorably with earnings of $47.8 million or 53 cents per share in the same quarter last year. Even with a major plunge in Molycorp shares after it reported disappointing earnings, it still appears to be far too early to try bottom-fishing in this sector. Here are a few reasons to stay away from the stock for now:

  1. In addition to the disappointing earnings report, the company announced that it might need to secure additional funds in order to provide for capital expenditures that are coming in the next few months. The company might need to secure financing or raise capital and that can often lead to a lower share price if the company dilutes existing shareholders.
  2. While the estimates provided by Yahoo Finance below indicate strong earnings, those estimates appear way too high, and are likely to be sharply reduced. One analyst at J.P. Morgan (JPM), (see earnings link above) has already reduced estimates for 2012, to just 30 cents per share. More estimates and downgrades are potentially looming in the coming days and that could keep the shares under pressure.
  3. While it may seem far off right now, the fourth quarter is really just about two months away. This could be significant to consider because the fourth quarter is when investors begin to sell stock "losers" in order to harvest tax losses. Since many investors have watched and lost money on Molycorp shares as it has gone from over $60 in the past year, to just about $11 currently, it means this stock is likely to see significant tax-loss selling in the coming months. With the company reporting losses and the potential need for capital, there seems to be little in the way of catalysts for a higher share price. That's why staying on the sidelines until at least November, probably makes sense with this sector.

Key Data Points For Molycorp, Inc. From Yahoo Finance:
Current Share Price: $11.49
52-Week Range: $11.31 to $63.60
Dividend: none
2012 Earnings Estimate: $1.11 per share
2013 Earnings Estimate: $3.14 per share

Data sourced from Yahoo Finance. No guarantees or representations are made.

Disclaimer: Please consult a financial advisor before making investments.

Source: Are Molycorp Shares Worth Buying On The Recent Plunge?