Is Molycorp Undervalued?

With shares of Molycorp (NYSE:MCP) trading around $5, is MCP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Molycorp engages in the production and sale of rare earth products that include oxides, metals, alloys, and magnets for various inputs in existing and emerging applications comprising clean energy technologies, multiple high-tech uses, defense applications, and water treatment technology. The research and exploration of rare earth products has been a hot trend in recent times. If these products to indeed produce significant results, companies like Molycorp stand to see explosive growth. As these technologies continue to be developed, look for Molycorp to make enormous profits if they become mainstream.

T = Technicals on the Stock Chart are Weak

Molycorp stock has witnessed a fair amount of selling pressure that has taken it to relatively low prices. The stock seems to be stabilizing at these prices but there does not seem to be an indication of a trend. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Molycorp is trading slightly below its key averages which signal neutral to bearish price action in the near-term.

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MCP

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Molycorp options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Molycorp Options

84.77%

36%

33%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Steep

Average

August Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or lw demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Molycorp’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Molycorp look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-183.33%

-166.59%

-107.46%

-105.77%

Revenue Growth (Y-O-Y)

73.32%

1.02%

48.93%

4.98%

Earnings Reaction

31.3%

3.33%

-13.59%

-28.5%

Molycorp has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets are becoming optimistic about Molycorp’s recent earnings announcements.

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P = Average Relative Performance Versus Peers and Sector

How has Molycorp stock done relative to its peers, Freeport-McMoRan (NYSE:FCX), Rare Element Resources (NYSE:REE), Avalon Rare Metals (NYSE:AVL), and sector?

Molycorp

Freeport-McMoRan

Rare Element Resources

Avalon Rare Metals

Sector

Year-to-Date Return

-37.82%

-13.13%

-43.82%

-48.53%

-16.82%

In a poor performing sector, Molycorp has been an average year-to-date performer.

Conclusion

Molycorp provides access to rare earth products that are still a controversial subject among consumers and companies worldwide. The stock has been the target of increased selling that has taken the stock near all-time low prices. Over the last four quarters, earnings have decreased while revenue figures have increased, but the markets are somewhat optimistic on Molycorp’s recent earnings reports. Relative to its weak peers and sector, Molycorp has been an average year-to-date performer. WAIT AND SEE what Molycorp does in coming quarters.

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