Rocket Stock or Dud?

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a rocket stock just before it takes a nosedive.

I readily admit that sometimes, stocks rise for a reason. But sometimes, the rise becomes the reason. No matter how often we caution them not to, investors do have a habit of buying "hot" stocks, and trusting momentum to keep 'em moving upwards.

Problem is, if the price goes up too much, even a great company can turn into a lousy investment (and if the company was less than great in the first place...) Below I list a few stocks that may have done just this. Stocks that, according to the smart folks at finviz.com, have doubled (or nearly so) over the past year, and just might be ripe to fall back to earth.

Companies

Recent Price

CAPS Rating
(out of 5)

General Moly (NYSE: GMO  )

$5.63

****

US Gold Corp (NYSE: UXG  )

$6.24

***

TransGlobe Energy (NYSE: TGA  )

$14.52

***

Companies are selected by screening for 100% and higher intraday price appreciation over the last 12 months on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

What does gold mining have to do with oil exploration? What do either of these endeavors have in common with the mining of molybdenum? All three businesses dig valuable "stuff" out of the ground. And thanks to rampant fears that runaway government spending will devalue the dollar, a run-up in commodities prices has sent the prices of such "stuff" soaring.

The stock prices of companies involved in mining that stuff have come along for the ride. Oh, I understand that it may not feel like it after a week like last, but even after the sell-offs of the past few days, investors in US Gold Corporation are still sitting atop a whopping 163% return on their investment for the past 12 months. General Moly shareholders are 113% richer, while TransGlobe owners enjoy a staggering 321% paper profit. But is the decline in stock prices we've recently seen just the first downward slip in a longer slide -- or a pullback that sets the stage for further gains?

If you subscribe to the latter theory, then your instinct might be to buy the cheapest stock on this list, molybdenum producer General Moly, hoping it has the greatest room to run. Coincidentally, that seems to be the same thing many Fools are thinking, as they rate General Moly the most attractive stock today. Are they right?

The bull case for General Moly
According to CAPS member modestus1, they are. The theory on this one is elegantly simple, says modestus: "Molybdenum going higher." And with it, General Moly.

elvoid agrees, noting that "Moly is an important part of stainless steel, other alloys...a strategic commodity." (One of several that China seems intent on embargoing, by the way -- a factor that's helped bolster the stock prices of rival moly plays like Molycorp (NYSE: MCP  ) .)

And according to CAPS All-Star kirkydu, this sets the stage for beaucoup profits at General Moly: "As the world economy rebounds over the next several years, scarcity of many resources will develop later in the decade. Molybdenum, which is added to iron ore to make steel, is in short supply. General Moly is in the final stages of opening up production of a new mine (Mt. Hope) and early stages of another (Liberty) in Nevada."

Generally unattractive
But therein lies the rub: If General Moly "is in the final stages" of anything, that's arguably just another way to say "it has not yet started" doing said thing -- which would actually be pretty accurate. With the grand-opening ribbons yet to be cut on its hypothesized mines, General Moly currently doesn't even have revenue to its credit, much less profit or free cash flow.

Don't get me wrong -- I admit the possibility that the stock could "work out for investors." After all, if you value the company on the one metric for which it has actual, positive, crunchable numbers, the company's price-to-book valuation of 4.3 is cheaper than more established mining businesses like Freeport-McMoRan (NYSE: FCX  ) or BHP Billiton (NYSE: BHP  ) . I suppose you could argue that this makes the stock "cheap," or even a candidate for purchase by a larger industry player.

Personally, however, I'm not a big fan of investing in pipedream stocks. They too often turn out to be duds. If you absolutely, positively must invest in a company that mines molybdenum, I still think that Thompson Creek (NYSE: TC  ) is your best bet. Profitable where General Moly is not, generating free cash flow where General Moly isn't, and selling for a price-to-book valuation that's multiples lower than what General Moly (or Freeport or BHP for that matter) sports, Thompson still looks to me the likely best way to play the rare earth run-up.

Disagree? Feel free. If you've got a few words to say in support of General Moly, say 'em here.

Fool contributor Rich Smith does not own (or short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 627 out of more than 170,000 members. The Fool has a disclosure policy.

Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


Read/Post Comments (4) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2011, at 1:04 PM, bonanza4000 wrote:

    Good grief Rich. You obviously have no idea what you are talking about. Please don't write about subjects that you are not schooled in. It's embarrassing. For one thing, Molycorp is not a rival of General Moly or Thompson Creek Metals. Molycorp is not even in the moly mining business. It's in the Rare Earth Element business and, soon, the high end magnet business. To learn what the Rare Earth Elements are feel free to use wikipedia and such. It only takes a few minutes. Secondly, Thompson Creek Metals and General Moly are not investments that one should look at as mutually exclusive in your portfolio, as you imply. Thompson Creek would be selected based on an investment thesis about their Mt Milligan gold and copper mine going into production in 2013 and, and only secondarily on the possibility that the price of moly might go up this year. General Moly would be selected based on an investment thesis about their Mt Hope molybdenum mine going into production in 2013, not on where the price of moly might go over the next year. The fact that TMF has apparently given you the right to use their name in your articles should require that you at least have some vague understanding what you are writing about. But it apparently does not. Uhhhgggg. Too bad for TMF.

  • Report this Comment On January 24, 2011, at 1:28 PM, awdaniels wrote:

    Transglobe Energy did rocket from a low of $3.68 to a high of $20.35. Your article dated Jan 24, 2011 did not mention on Jan 10, 2011 they announced a $75Million bought deal financing at $15 per share with an over allotment of 750,000 shares. My opinion is that they will be able to cover all their debt and have the ability to increase activity, so I believe $15 is the launching point to future success and may rocket once again if lady luck keeps smiling on them. I like their chances.

  • Report this Comment On January 24, 2011, at 5:05 PM, zack888 wrote:

    I'm still scratching my head as to why Thompson Creek Metals (TC) is to be selected versus General Moly based on the Mt. Milligan gold and copper mine project and only secondarily on Thompson Creek's successful and currently operating molybdenum business? Thompson Creek has one of the best balance sheets in the actual molybdenum mining category, with excellent cash flow and cash reserves and is strategically set to continue performing well above par for many years into the future. The point being made by Rich is, where do you want to put your investment faith? Into a company which has yet to market one ton of molybdenum (or anything else) or into Thompson Creek which has a track record of performance many investors like myself greatly appreciate and admire? I look for investment opportunities with good performance records and proven, solid capabilities. Those characteristics are what led to my initial attraction to Thompson Creek Metals. I would never go into a mining stock of any type without strong performance characteristics. To me, choosing Thompson Creek over General Moly is an easy call if actual performance counts as a big part of your criteria. I believe Mt. Milligan will be more like frosting on the cake, not the deciding factor between General Moly and Thompson Creek Metals. In my opinion, Rich does know what he is talking about in recommending investors consider Thompson Creek as a better way to play the rare earth run-up. Rich has done his homework, not sure about others.

  • Report this Comment On January 26, 2011, at 4:30 PM, bonanza4000 wrote:

    To spell it out more fully...

    1) As I stated MCP is not even in the Molybdenum (or copper or gold) business. So offering MCP as a point of comparison agains TC and/or GMO is completely inaccurate. MCP is/willBe in the REE and high end magnet business. So let's just remove MCP from the equation.

    2) Noone should be invested in or recommonding a mining company of the size and simplicity of TC without having done a financial analysis (NPV, etc) of the expected revenue and profit stream from their mines. This is because (a) it's so easy to do and (b) the production profiles from TC's Thompson Creek and Endako moly mines are and will be changing significantly.

    3) Such an analysis of TC, ignoring it's Mt Milligan mine and assuming the price of moly is in the current $17 range, is not very compelling imo given the current stock price. It was compelling when TC was at $8 a few months back, but not here in the $14 area.

    4) If your analysis instead assumes that the price of moly is in the $21 range (20% higher than now), then it gets better. But not by anywhere near enough to make that factor more important than TC's Mt Milligan Mine.

    5) Now if you add the impact of TC's Gold and Copper Mt Milligan mine, which is now fully permitted and under construction, into the TC analysis you get a stock price that is, roughly speaking, at least 100% higher than the current $14.

    6) Mt Milligan and it's Gold and Copper content is why I own TC, not because there is some chance that the price of moly may ramp this year. But if the price of moly does ramp this year, all the better.

    7) Mt Milligan I think makes TC one of the best ways to get exposure to Gold and Copper. Most gold and copper miners are already highly valued.

    8) If TC did not have Mt Milligan on the horizon I think TC's stock price would be alot lower, and not a compelling investment. imho

    So, what about GMO...

    1) GMO has a truely *huge* moly deposit in its Mt Hope Nevada property. And a secondary moly and copper deposit in its Mt Liberty.

    2) The first 5 years of GMO's moly production is already sold via offtake agreements with some of the largest steel producers in the world and a metals trading company. These offtake agreements have a floor price but not a ceiling price.

    3) Construction costs for the Mt Hope mine is already fully financed.

    4) The remaining permitting steps are expected very soon. They primarily include: (a) The permits to use the water rights, that they already own, for the purpose of mining at the Mt Hope mine, the approval or decline of these permits is expected this March and all indications are that this will be approved becaue the state water engineers in agreement. (b) The final ROD (Record of Decision) from the federal Bureau of Land Management. This is expected sometime in June/July/Aug time-frame,

    5) Nevada is one of the *worlds* most mining friendly jurisdictions, and the area that the Mt Hope mine is in in Nevada has many mines in the area.

    6) The Mt Hope moly deposit is a surface deposit and has a very high grade. As a result it will have very low production costs.

    7) If you run the NPV and/or Sales/Profit/PE analysis against the expected production volume, production costs, and a moly price in the $15 range you get a stock price in the mid to high teens, roughly $18. This is about 200% higher than the current stock price.

    8) If you then add GMO's Mt Liberty moly and copper production profile, and assume copper is in the $4 range, into that analysis you get a stock price in the high twenties. This is about 350% higher than the current stock price.

    9) Now, if you increase your assumption about the price of moly to $20, then you get a stock price notably higher than even those number.

    10) These factors are why I also own GMO.

    I hope this helps you see why I think that the decision of whether or not to invest in GMO and/or TC is much more interesting, and potentially profitable, than what can be seen on the surface.

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