Wednesday, November 24, 2010

JP Morgan: "Molycorp's shares face near-term headwinds to hedge against." (MCP)

The stock closed at $30.44 on Tuesday, down $1.15 (3.64%).
From Barron's The Striking Price column:

A Rare Play on Rare Earth 
MOLYCORP, A RARE-EARTH PRODUCER, is one of Wall Street's darlings. The stock has gained 238% in the past year amid global-supply concerns, but now some influential trading advisors are wondering if the stock is due for a rest.

Amyn Bharwani and Marko Kolanovic, J.P. Morgan Securities' derivatives strategists, are telling clients to consider using options to hedge Molycorp's (ticker: MCP) stock as the shares could face near-term turbulence that will limit the stock's advance.

The bearish view hinges on risks surrounding Chinese export quotas and the discrepancy between Chinese domestic and export rare-earth oxide prices. China produces nearly all of the world's rare-earth minerals, and recently announced that it was limiting exports, which was beneficial for Molycorp as many U.S. investors wanted to own U.S. firms involved with rare-earth oxides. The minerals are critical parts of many technologies and military applications.

Another potential obstacle to further stock-price gains is Molycorp's large insider ownership. J.P. Morgan rates the stock at Neutral and has a December 2011 price target of $36, some $4 above the current stock price.

To protect the strong gains in the stock, investors can consider buying puts and selling a bullish call to hedge the stock.

Bharwani and Kolanovic told clients to consider buying Molycorp's March $30 puts, selling the March $22.50 puts, and selling the March $35 calls. The three-part trade recently cost 15 cents, and hedges against any fall in the stock's price from $30 to $22.50. If the stock does not decline as anticipated by J.P. Morgan's strategists, and instead stages a powerful advance, the hedge limits any gains above $35....MORE