Sometimes Wall Street is truly like a casino. At least that is what people treat it as and those are the investors that get burned badly. This stock has all the earmarks of a speculative frenzy. It has a market cap close to $5 billion, with only about $15 million in trailing revenues. It’s price/sales ratio is 267x. (That is price/sales, not price/earnings). Obviously, profitability is not on the horizon, and an analyst just slapped a huge price target on the stock. Is this 1999? No, but this stock has the same characteristics of a 90′s internet stock. Meet Molycorp (MCP).
I have been following this stock for a few months now and I feel bad for anybody who has attempted to short it. On no news it can go up 15% in the blink of an eye. It was trading in the $20′s as recently as December 6th, and has more than doubled in less than a month. With the stock starting the year around $50, Dahlman Rose put an $85 price target on it and it shot up 15% to start the year.
Rare Earth Magic
There has been reason to be bullish as China has announced its decision to reduce exports of rare earth metals that are used in a variety of high-tech processes. Last month, Molycorp announced it would produce 20,000 tons of rare earth metals by the end of next year. The thinking is that firms will be going to companies like Molycorp since China has reduced its exports. I don’t disagree with this premise, but everything has a price. The stock is already worth almost $5 billion and any meaningful revenues, let alone earnings are still far off.
In many ways, this is a perfect speculation stock because it has a small float, real financials won’t occur for a while, and China is involved. Remember Amazon.com (AMZN) and how much it went up before it earned a cent? It struggled once it actually earned money because investors could put a price on its earnings.
Please Don’t Short!
I absolutely do not recommend shorting this stock as there could be plenty of speculative juice left in it, but I wouldn’t chase it up here either. I just enjoy sitting back and observing the daily moves because I think it helps to understand the mindset of speculators. If the risk appetite of investors drops, this stock could fall $20 in a heartbeat and you don’t want to be left holding the bag.
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