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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given that, 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. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best …
Yesterday, "rare earth" investor-darling Molycorp (NYSE: MCP ) announced a price hike in one of its "major" contracts for the production of lanthanum. The news sparked a run-up in the stock, with a sympathetic reaction at fellow rare-earther Avalon Rare Metals (NYSE: AVL ) (but curiously, a negative reaction at China Shen Zhou Mining (NYSE: SHZ ) .) Surveying the field, however, broker Global Hunter Securities skipped right past these three rare earth plays … and upgraded Rare Element Resources (NYSE: REE ) instead.
What's got Global Hunter so hot for Rare Element? As StreetInsider.com reports, the analyst likes the fact that: "Rare Element Resources … is advancing the Bear Lodge rare earth project towards production … [of] critical/strategic metals currently in short supply and facing export restrictions from China. We believe the project's location, straightforward mining plan and relatively low capex makes Rare Element a compelling investment at this time."
Now, we've been hearing about the Chinese-quota case for buying rare earths companies for quite some time. But here's something you may not have heard about Rare Element: "The company also has an adjacent low grade, but high tonnage gold deposit, Sundance, which has a resource in excess of 900k oz Au. We believe that Rare Element is undervalued based on the upcoming catalysts and advantages over other development companies in the [rare earth element] sector."
REE -- Q.E.D?
A rare earths play with a gold-bug kicker? It sounds too good to be true. And yet, Global Hunter has a pretty decent record of picking winners in the metals and mining sector. It's only 50-50 on its pickers here historically, granted. But winning bets on precious metals miners, like its recommendation to buy profitable Silvercorp (NYSE: SVM ) and sell unprofitable AuRico Gold (NYSE: AUQ ) , have helped Global Hunter amass an overall winning record in the mining industry, outperforming the S&P 500 by a combined 36 percentage points on five separate picks. Who's to say newly-minted gold miner Rare Element Resources won't be its next winner?
Me. That's who.
The trouble with Rare Element
The problem with recommending Rare Element, you see -- the thing that sets it apart from Silvercorp -- is that unlike Silver Corp, Rare Element isn't just unprofitable. It's downright un-revenue-able. Not a silver (or gold) penny's worth of revenue in the stream, and it's burning cash to boot. Sure, maybe there's gold in them thar hills. Maybe there's even some recoverable rare earths.
Bulls may say Rare Element is poised to begin production any day -- but face facts, Fools. Rare Element has been "getting ready" to produce for eight years now, and still hasn't generated any revenue at all -- from lanthanum or from gold either one. (Just lots of money from selling pipedreams to investors.)
Will Rare Element eventually start producing? Perhaps. But investors today have no way of knowing how profitable (if profitable at all) the company will become. Rare earth prices are through-the-roof today, owing to Chinese quotas on their export. But over in Europe, the WTO is busily working to tear down China's export restrictions. If it succeeds, much of the investment case for mining "rare" earths (which really aren't that rare at all -- just not very profitable to extract) in North America could evaporate.
As for Global Hunter's gold idea, well sure, it's intriguing. But the key reason to own Rare Element has always been its rare elements. If you're looking for a gold play, you're probably better off buying someone who's actually mining the stuff, and making a profit off of it, like Freeport McMoRan Copper & Gold (NYSE: FCX ) .
My advice: Leave the gambling to the professional gamblers on Wall Street. Personally, I prefer real companies, with real profits.