Every company had to start somewhere and many of today's biggest companies have had the "overvalued" label slapped on them at some point in their existence. There are some stocks, though, that are trading at eye-popping valuations that'd be best compared to reaching for the stratosphere.
How do we find these companies? Rampant speculation in rare-earth metals led me to run a search on any stocks trading at an infinite price-to-sales ratio, regardless of sector. Sure, I could fill a cookie jar with biotechnology names which often need years of research and development before a product is brought to market, but where would the fun be in that? Instead, I opened my mind to other sectors and discovered two potentially money-draining investments.
Only production is rare
Rare Element Resources (AMEX: REE) piqued my interest because it was up over 200% in the last year. The company is positioned in the highly speculative rare-earth metal industry, which has seen big run-ups from Molycorp (NYSE: MCP), among others.
Rare Element's market capitalization is $475 million, yet it is still a minimum of four years away from getting its Bear Lodge mine up to full production. Currently it has four -- yes, four -- full-time employees and continues to burn through its cash on hand. The only solution thus far has been to issue shares at an extraordinary rate in order to generate cash, which dilutes existing shareholders. The long-term picture on rare-earth metal prices is still very much up in the air, so investors could be playing with fire by owning a company still years away from production.
Hyperdynamics goes plaid
Hyperdynamics (AMEX: HDY) has shot past ludicrous speed and gone straight to plaid, rising over 550% in the past year. What does Hyperdynamics have to show for this gain? Not very much.
Hyperdynamics recently signed a letter of intent with a large independent oil and gas company to farm out a portion of its interest in land off West Guinea. Aside from a steady stream of press releases, the company has yet to produce a dime of revenue and is still many months away from drilling its first exploratory well. It could get lucky like Anadarko Petroleum (NYSE: APC) and discover a huge find off the coast of Africa -- or it could wind up completely out of luck. Until we know either way, investors in Hyperdynamics may want to prepare for further share dilution and wild price fluctuations.
The Foolish finale
Investors often want to get in on companies they see as pioneers before they begin pumping out profits, but this method doesn't come without risk. It could be years before we see any tangible results from these two companies, and I have to wonder if there will be any value left in these stocks by then.
Do you have an opinion on any of the companies discussed above? Let's hear about it in the comment section!
Fool contributor Sean Williams owns put options on Molycorp, but has no stake in any other companies mentioned in this article. He wonders how many readers will catch the Spaceballs movie reference. You can follow him on CAPS under the screen name TMFUltraLong. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
