Wednesday, May 11, 2011


On January 6th of this year I posted an article called MCP BREAKDOWN about the craziness of the valuation of a company in a "hot" sector.  Molycorp (MCP) has been the darling of Wall Street receiving loads of hype and a tremendous amount of attention.  A perfect storm has developed as the company is exploiting a space where there is real need in terms of the product that they intend to mine and geopolitical issues related to the supply that is already available in the world.  Back in January and the preceding months China had taken overt actions to limit the amount of rare earth metals they were going to sell on the world market.  Obviously the threats of controls jacked up prices and also pushed stock prices of those mining companies through the roof.

As we all know, investing is about anticipating the next move, not just catching the one that is in play today.  If you are not looking forward, you will end up catching the tail end of a rally only to be left holding the bag.  (Ask buyers of silver at $48.00 how that feels just one week later).  Is the "anticipation effect" enough to justify the valuation of MCP where it is?
I'm not sure is the clear answer, but everything in me says no.  Recall in the post that I discussed how revenues were expected to be $15 Million for the year and the valuation of the company was close to $5 Billion?  It is great to see that since that time revenues have increased to $35 Million, but of course the valuation of the company is even greater now that the stock has traded almost $20.00 higher.  Now this post is a bit late to the party since MCP is now trading around $63.00 a share, but it is still noteworthy because that price level is still about $8.00 greater than when I called it overvalued in the first place! 

Who knows what the future will bring, but one thing experience has taught me is that companies that have rise fast and furiously often produce situations where obscene valuations don't match the hope and speculation about future growth.  More often, these situations usually don't end well for the stock holder.

Take a look at the chart and notice there is some weak support at $63 where it has bounced as I finish this note, however, the bottom of this ascending channel could take MCP down to the $50 area.

Be Careful!


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