What happened
Shares of rare-earths mining company MP Materials (MP -0.38%) took off like a rocket on Monday, rising 10.3% through 1:15 p.m. ET. It's not earnings that did this, however; the second-quarter earnings report isn't due out until next week.
Instead, it was the S&P and the investors who watch it.
So what
As announced late on Friday, after close of trading for the week, the S&P Dow Jones indexes plan to add MP Materials stock to the MidCap 400 index on Wednesday morning, July 27. The stock will replace outgoing Sanderson Farms, which just got gobbled up by Cargill and Continental Grain and is no longer publicly traded.
MP Materials stock will now plug that hole, and investors today are betting that as exchange-traded funds and mutual funds begin buying shares of MP Materials to reflect the index's new composition on Wednesday, the share price will rise due to the influx of new demand. Aiming to front-run that buying action, they're snapping up shares today in hope of turning a quick profit when the price rises Wednesday.
Now what
For momentum traders, this makes sense. But what about the rest of us? Should we be buying MP Materials stock, too, regardless of what's happening on the index? Here's how I look at it:
MP Materials is not a cheap stock, but it's not exorbitantly priced, either. Valued at about 26 times earnings, it's about 30% more expensive than the average S&P 500 stock. MP Materials boasts an above-average balance sheet, however, with $545 million in net cash, and just turned free-cash-flow positive ($54 million in cash generated over the last 12 months). So for the time being at least, that balance sheet looks very safe.
That $54 million is still a lot less than the $205 million in net profit the company claims on its income statement, so there's an argument to be made that this company isn't as profitable as it seems. On the other hand, analysts forecast that MP Materials' free cash flow will nearly triple next year to $142 million, then nearly double again to $276 million the year after that, as the company continues to scale up its rare-earths mining operations, and expand into more and more value-added products.
While MP Materials stock is no slam-dunk bargain today, you don't have to look very far down the timeline to see a point where it might become cheap enough to invest in.
