Molycorp Stock Has 42% Upside

A firm called D.A. Davidson initiated coverage with a Buy rating and a $7.00 price target on Tuesday. After closing at $4.91 on Monday and hitting a 52-week low of $4.87 on Monday, that represents an upside projection of 42.5%. We have a hard time trusting the number offered up here now that the stock has fallen so much, but Thomson Reuters lists that the consensus one-year price target from analysts is over $9.00 on the stock.

The firm sees the bad news being priced into the stock. The investment in California is expected to allow it to be a low-cost provider of rare earths. With as volatile as the pricing and availability has been, this is important. Even the possible (or likely?) delay at building capacity may be factored in if the analyst is correct.

With a questionable management shuffle taking place recently, some investors may have the ultimate fear here in Molycorp. Shares are up 6% at $5.20 today, but the 52-week trading range is $4.87 to $35.79 and this stock briefly traded above $70.00 in 2011.

A move of this sort is questionable when it is from a small brokerage firm. Still, this is a battleground stock and any news that is even remotely good is likely to send shares higher.

Molycorp’s short interest as of mid-March was a whopping 37.2 million shares. That is the highest on record over the last year. Imagine what real news might cause in a short squeeze.

If you think that this call is a game-changer for the rare earth materials, it might not be. Calling for 42% upside is aggressive, so we want to see what is happening in the Market Vectors Rare Earth/Strategic Metals ETF (NYSEMKT: REMX). That ETF is actually down 0.7% at $10.67 on the day. Molycorp’s weighting is down to only 3.79% now that its stock has fallen on hard times. We would argue that if this call was a true game-changing call from an analyst that the rest of the sector would be surging with it even U.S. listings only account for just under 15% of the total 82.46% weighting of the top 10 holdings in the entire ETF.