Rare Earths Micro-Cap Stock… But for How Long?

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AVL_LogoFollowing a wild 2011 at the hands of a slack global economy and China’s dubious export policies, the rare earths sector is undergoing a renaissance of sorts in 2012. The Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX), the lone U.S-listed ETF devoted to rare earths stocks, is up over 12% year-to-date and is now positioned to break through some stiff horizontal resistance and deliver even more upside to savvy investors.

Micro-cap stock poised to rally and move up in status

Speaking of the Market Vectors Rare Earth/Strategic Metals ETF, one of its components is starting to look like it’s poised to join the rare earths rally and shed its micro-cap status. We’re talking about Canada-based Avalon Rare Metals (AMEX: AVL).

As has been the case with so many rare earths miners, Avalon Rare Metals had its day in the sun in 2010, but the stock was hammered last year. In the past year, Avalon has plunged almost 72%. Last year at this time, the stock traded for over $10. For the last few days, AVL has been trading below $3.

All that said, Avalon has gotten its act together this year and the stock has jumped 20%. Should AVL be able to clear a little stiff resistance just over $3, that could attract some fresh buying.

Analyst comments

Analyst Mo Dawoud recently called Avalon, “one of the second-tier rare earths miners that investors should consider.”

Now the question is… can the good times continue for the rare earths group? Well, the U.S., Japan and the European Union have teamed up in the World Trade Organization to force China to export more rare earths, news that boosted the fortunes of rare earths stocks.

For its part, China points out that there are supplies of rare earth metals around the world and that Western powers should work to exploit these deposits instead of harassing China, according to Zack’s Investment Research.

REMX heavily weighted in small-cap and micro-cap stocks

China is correct about that. There are rare earths in the Western world and Avalon is one of a small amount of companies working to actually get those elements out of the earth. If ETFs are your cup of tea, it’s worth noting that almost 60% of REMX’s weight is allocated to small- and micro-cap names.

It should come as no surprise that Avalon is a high beta stock. Really high beta. The S&P 500 has a beta of 1. Avalon’s beta currently stands at 2.44. On the other hand, the stock’s 2011 tumble means the shares currently trade at just 1.3 times forward earnings and that’s cheap even by the standards of the beaten down rare earths group.

 Bottom line for Avalon

So what’s the prognosis for Avalon for the rest of 2012? If we had to guess, more volatility and more upside, but that all depends on what China wants to do with rare earths exports. Let’s put it like this:

Is Avalon Rare Metals (AMEX: AVL) a stock worth trading? Absolutely.

Is it worth establishing a buy-and-hold posture the way you would with a stock like Coca-Cola (NYSE: KO)? No way. That’s not a criticism of AVL, just an acknowledgment of the obvious risks.

MIke Casson                                                                                                                                                                                          Executive Editor