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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
After the feast ... another feast
I sure hope the analysts at Citigroup asked for seconds this past Thanksgiving and packed a lot of leftover turkey sandwiches for the office, too, because it's looking like they won't be visiting home again anytime soon. It's shaping up to be a busy post-holiday week for Citi, you see. Already, we've seen the banker publish positive prognostications on companies ranging from ...
- Genworth Financial (NYSE: GNW ) -- "The market appears to be overly discounting the possibility of bankruptcy risk."
- Electronic Arts (Nasdaq: ERTS ) -- the shares offer "an attractive entry point" at 17% below recent highs.
- And, of course, Google (Nasdaq: GOOG ) -- "its valuation has become more attractive as estimates have increased while its share price hasn't."
Brave calls all, but these aren't the only stocks Citi wants you to buy. Oh, no. Yesterday we learned that after hitting all the high-profile names, Citi recently dug down deep to find what it considers a real gem of an investment: Avalon Rare Metals (AMEX: AVL ) . Avalon, it would appear, is now Citi's new best friend in the mining industry.
Never heard of Avalon, you say? I can't say as that surprises me. So before we get to Avalon, let's lay out some context. Like higher-profile miner Molycorp (NYSE: MCP ) , Avalon is basically a play on Chinese restrictions on the export of certain minerals used in manufacturing a wide variety of high-tech devices -- everything from iPhones to car batteries to smart bombs. Dubbed "rare earths," these minerals aren't really "rare" so much as they're deeply uneconomical to mine, refine, and bring to market. As a result, historically, few companies have bothered to go to the time and expense of digging them up.
As I mentioned, though, this changed recently when China began imposing export restrictions aimed at keeping the minerals -- and the value-added manufacturing of the high-tech items they're used in -- within China's borders. In response to these restrictions, companies like Molycorp, Rare Element Resources (AMEX: REE ) , and yes, Avalon Rare Metals, have sprung up to fill the gap in supply. And whenever any one of them reports any news the least bit positive, the stock tends to explode.
That was the case late last year, when Molycorp inked a deal to help Hitachi produce rare earth magnets. It was the case again this week, when Molycorp signed a similar deal to make magnets in cooperation with Japan's Daido Steel and Mitsubishi. And adding fuel to the fire, it was the case when Citi announced that "based on an expected global deficit of [rare earths and] AVL's attractive mix of heavy REEs and byproducts," it was initiating coverage of Avalon with a "buy" rating.
Does this make sense?
Sadly, it's not a good reason for you to get excited about Avalon metals. You see, Citi may be right that Avalon has access to "heavy REEs" and ... um, "byproducts." I suppose some geologists might even call these rocks "attractive." (Others might say the have a cleavage face that only a mother could love.)
One thing Avalon does not have, though, is a history of turning these assets into profits. To the contrary, over the past 15 years it's been in business, Avalon has earned an annual profit exactly zero times. The years in which it generated positive cash from operations similarly add up to zero. Instead, Avalon has basically puttered along, consuming cash and generating no profits to show for it -- up until recently, when it began gearing up to take advantage of China's export restrictions and began burning even more cash at ever-quickening rates -- $7.5 million in fiscal 2008, $7.9 million in 2009,then $15 million last year and around $17 million so far this fiscal year.
Once in a deep, dark, hole, stop digging
Now, optimists will surely argue that this is all about to change, just as soon as Avalon gets its flagship Nechalacho project up and running. Me, I have my doubts. Already, the World Trade Organization has declared China's export restrictions illegal. Seems to me it's only a matter of time before China's trading partners require it to open up its markets to rare earth exports, eliminating the chokehold on global supplies, and causing rare earths prices to plummet. If I'm right about that, Avalon's going to wind up right back where it was these past 15 years -- doing nothing, and earning less.
Seems to me the writing's on the wall for Avalon. I only hope that investors read it, instead of reading Citi's buy recommendation.
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