Would You Like to Play Russian Roulette with Molycorp’s Stock?

With shares of Molycorp (NYSE:MCP) trading at around $10.70 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:

C = Catalyst for the Stock’s Movement

Molycorp is suddenly on everyone’s radar. Apparently, it’s the hot stock right now. Molycorp is an industrial and minerals company with a focus on rare earth elements. Rare-earth oxides have value because of their importance to clean energy.

A lot of news has come out for Molycorp. Mountain Pass Mine is expected to show a Phase One production rate of 19,050 metric tons per year. Earnings are expected to increase up to 20 percent over the next five years. Revenue is expected to increase 54.20 percent this year and 52.90 percent next year.

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If you were to stop reading now, then you might be sold on the bullish side of the story, but there is a lot more going on here.

If you’re not familiar with the story, it’s basically a matter of short interest vs. insider buying. Short interest recently climbed to over 60 percent, which is rarely seen for even the most hated stocks in existence. The reason for this burst in short interest was because of an SEC investigation announcement with a focus on the accuracy of previous disclosures. The stock had been hammered since that announcement, but then insiders stepped in and began buying up stock at a rapid rate. Over the past six months, over seven million shares have been purchased. The insiders at Molycorp were correct the first time around when they sold tons of shares between $50 and $51. Will they be correct again? Let’s take a look at some numbers, which can help remove all the hype and help paint a clearer picture.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Molycorp is normal. The balance sheet might be in the negative, but it’s at a controllable level.

Debt-To-Equity

Cash

Long-Term Debt

MCP

.76

$436 Million

$1.22 Billion

REE

N/A

$47.36 Million

$0

AVL

0.00

$46.04 Million

$0

 

T = Technicals on the Stock Chart Are Poor

Molycorp had a great run early this week, but the past year has been atrocious. Rare Element Resources (AMEX:REE) and Avalon Rare Materials (AMEX:AVL) have also performed poorly over that stretch, so Molycorp isn’t isolated in this regard. The drop has been industry-wide.

1 Month

Year-To-Date

1 Year

3 Year

MCP

42.67%

-55.38%

-63.38%

-19.69%

REE

-8.35%

11.38%

-25.97%

11.38%

AVL

-4.00%

-39.24%

52.32%

-36.28%

 

At 10.70, Molycorp is currently trading above its 50-day SMA and below its 100-day SMA and 200-day SMA.  

50-Day SMA

9.55

100-Day SMA

11.41

200-Day SMA

18.47

 

E = Earnings are Weak, But Revenue Is Unreal  

Annual revenue growth for Molycorp has been off the charts. Simply looking at these numbers gives a clear indication as to why the SEC might have interest in looking at some numbers. This type of growth isn’t seen often. Actually, it’s extremely rare as well as borderline unrealistic. However, anything is possible.

2007

2008

2009

2010

2011

Revenue ($)in millions

N/A

2.137

7.093

35.16

396.83

Diluted EPS ($)

N/A

-.36

-.72

-.81

-36.28

 

It’s actually refreshing to see realistic Q3 YoY numbers.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

138.05

132.90

84.47

104.58

205.60

Diluted EPS ($)

.49

.29

-.07

-.71

-.19

 

T = Trends Do Not Support the Industry

Rare earth elements could be in trouble. The biggest reason for this is that Toyota Motors (NYSE:TM) has decided to build hybrids without using rare earth elements. Longs will state that Toyota is only one company, but you have to take momentum into account. Once another auto company sees what Toyota is doing, if it saves them money, they will make the same move. It’s also time to admit that clean energy isn’t nearly as popular as it was when the price of oil traded well above $100/barrel. Will clean energy become popular once again? Yes. But based on current economic circumstances, it doesn’t seem like it will be anytime soon. Oil, and the price of gas, will continue to slowly drift lower.

Conclusion

It seems as though traders have conviction in the purchase of Molycorp shares because insiders are buying. Sorry, but that’s not reason enough to jump on the bandwagon when the SEC has interest in the accuracy of previous disclosures. This is a huge gamble, and if it doesn’t pan out, investors will be in a world of hurt. There is a famous saying on the street, “A missed opportunity is always better than a loss.” Could shares of Molycorp go to the moon over the next few months? Absolutely, but is it worth the incredibly high risk?  

Even without the SEC story, this is a stock with a P/E of 23.76, a beta of 3.84, no yield and weak cash flow. Toyota is also moving away from the industry and there is increased competition. Needless to say, this is a STAY AWAY.

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