Conventional wisdom indicates that you shouldn’t hit a man when he’s down (or ever, really, depending on who you ask), but analysts at JPMorgan (JPM) apparently didn’t get the message.
One day after Molycorp (MCP) reported slumping earnings (again) and saw its stock plunge 18.46 percent, JPMorgan lowered its rating from “neutral” to “underweight,” prompting another plunge in share price of over 15 percent that brought 3-day losses to more than 30 percent.
Shares in the rare-earth miner gapped down just 3.8 percent to $3.57 apiece at the opening bell, but heavy selling kept the stock plunging as the day wore on. The losses were persistent and consistent, and shares were approaching $3 apiece at the closing bell.
The earnings report that kicked off this bout of losses showed that plunging prices for rare earth metals, an offshoot of improving supply, continue to hurt Molycorp’s bottom line. President, Director, and CEO Geoffrey R. Bedford, though, stressed that the current market conditions should improve.
“We always retain a measure of cautiousness when speaking towards future market trends, but as I look ahead, despite a slower start than originally anticipated, I see this year as a pivotal and exciting time for our company,” he said on the earnings call. “As Mountain Pass production continues to increase, it will provide the market with the greater supply stability and increased price visibility it is demanding. I’m optimistic about the continuing prospects for long-term growth and demand for the engineered materials we make and for our Company’s ability to capture multiple margin opportunities across our integrated supply chain.”
Certainly, Mr. Bedford could certainly use a shift in market dynamics, because the current state of affairs is pretty brutal for Molycorp’s balance sheet. The company posted a 15.4 percent year-over-year decrease in revenue for Q4 of 2013, and now Q1 2014 brings another 19 percent decline over last year’s corresponding quarter to $118.5 million. Moreover, revenue slumped 4 percent from last quarter despite a 10 percent uptick in shipments. This would mark the fourth straight quarter of sequential declines that have now totaled 57.9 percent.
Earnings…weren’t. Losses of $0.40 a share ($86.1 million total) were a significant improvement over the $0.98 a share loss, but still represent a 48.1 percent year-over-year increase in red ink.
The timing of the earnings report and downgrade couldn’t have been worse from a technical standpoint. The chart pattern for Molycorp leading up to this report was pretty clearly a classic descending triangle, with steady support at $4.50 a share dating back to the start of December and a falling resistance line dating back to late September. These converging levels usually mean a big breakout either up or down is on the horizon pending the appropriate catalyst. And, unfortunately for Molycorp, this most-recent earnings report and pile-on by JPMorgan appear to have provided all the catalyst the stock needed to plunge below support and hit a 52-week low.
However, Molycorp investors can at least take solace in the fact that the stock’s technical point to it clearly being oversold. Like, WAY oversold. Not that that should be any surprise when a stock losses a third of its value in less than a week, but it’s still something. Molycorp now sports a 14-day RSI below 15, its 14-day stochastic RSI is at 0.00, and it’s trading well below its lower Bollinger Band.
So, all of these could point to at least a partial bounce back at some point in the next week, regardless of what’s going on with the company. Which isn’t to say that some stocks don’t trade in oversold territory for extended periods of time when the underlying fundamentals or market conditions seem to call for it. If more analysts start following JPMorgan’s lead and piling on with downgrades, those technical factors aren’t likely to convince anyone.
In the end, it’s important to note that Molycorp’s long-term health hinges entirely on the demand for those rare earth metals. And any play involving Molycorp’s stock would hinge on that factor. An investor thinking rare earths are bottoming out and due to reverse their current trend at some point this year would likely look at Molycorp’s current position and see a chance to buy in at the bottom. However, an investor thinking the rare earth market is going to maintain its current position or even see prices decline wouldn’t want any part of Molycorp no matter how oversold it might look.