Rare Earth Metals in a Bubble?
Since hitting the market over a year ago, the entire gamut of rare earth metal companies has been on a tear. Many of these stocks have gained several hundred percent over the past year as investors embrace a sector that’s virtually dominated by the Chinese in terms of net supply.
Rare earth metals include names or words that are difficult to pronounce, but they are important components in cell phones, military equipment and other devices that are regularly used by consumers and individuals every day.
Things like yttrium, lanthanum, praseodymium and holmium are but a few rare earth elements embedded in the earth’s crust. Estimates point to China controlling about 95% of the rare earths market.
When you have a commodity or a group of commodities in supply deficit then that’s the recipe for profits. Investors assume that rare earth metals are the next Big Thing and have embraced the sector, driving share prices to “bubble” valuations.
But according to The Wall Street Journal, the party might be over.
Short-sellers are swarming the small rare earth sector this summer compounded by some insider selling at one of the leading North American rare element producers. Some of these stocks are down more than 35% off their peak.
Molycorp (NYSE-MLY), the largest non-Chinese rare earth metals company, trades at more than seven times book and has negative earnings. The company has net cash but its return on equity is negative.
Everyone is pretty convinced that rare earth metals are here to stay. I agree. They’re important components potentially made difficult to secure because China controls such a vast expanse of the minerals. But everything has a price and the big rally for these stocks looks like it’s exhausted. Better to wait for the bust and then build fresh positions.