Why Shares of MP Materials Are Sinking This Week
Key Points
The U.S. and Australia signed a critical materials agreement earlier this week.
Shares of MP Materials are trading at a premium to their historical valuation.
The stock's pullback provides a buying opportunity for long-term investors.
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Prior to the start of this week, MP Materials (NYSE: MP) stock had performed well in October, climbing more than 20%. This week, however, the market showed that there is a limit to the exuberance it has for rare earth stocks. In addition to President Trump signing a critical materials agreement with Australian Prime Minister Anthony Albanese earlier this week, investors are sensing that the valuation of MP Materials stock has become too rich, motivating them to move away from it.
According to data provided by S&P Global Market Intelligence, shares of MP Materials are down 12.1% from the end of last Friday's trading session through 10:40 a.m. ET today.
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Digging into the causes for shares of MP Materials plunging lower
On Monday, President Trump and Australian Prime Minister Anthony Albanese signed an agreement that will see each nation commit $1 billion over the next six months to various critical minerals operations, in addition to setting a minimum price floor for critical minerals.
Lauding the deal, President Trump stated, "In about a year from now, we'll have so much critical mineral and rare earths that you won't know what to do with them."
Separate from news of the agreement with Australia, the fact that MP Materials stock had soared to a lofty valuation led investors to push the pause button on buying activity. Currently, MP Materials stock is still richly valued, trading at 46.3 times sales, a premium to its five-year average price-to-sales ratio of 14.8.
Is now a good time to load up on MP Materials stock?
The fact that investors have turned away from MP Materials stock this week is hardly surprising. With President Trump's claim that rare earth supply will soon be plentiful, investors are speculating that the price of rare earths will drop and adversely affect the profitability of the rare earth mining stock.
However, for those with long-term investing horizons, the stock's pullback provides a great buying opportunity, since the company is an industry leader poised for growth in the coming years.
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Scott Levine has no position in any of the stocks mentioned. The Motley Fool recommends MP Materials. The Motley Fool has a disclosure policy.
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