Investor Essentials Daily

This materials company cozied up with high tech

June 6, 2023

The world is innovating at a pace never seen before.

Investments in research and development are at their highest, and we are spending more on it as a percentage of total GDP.

As we develop high-technology products, one of the scarcest things we need is rare earth materials.

There is only one major provider of these materials in the Western Hemisphere. It owns and operates the Mountain Pass Mine, MP Materials (MP).

The company has an immense competitive advantage and is enjoying high profitability. However, the market fails to understand this, causing the stock to trade at absurd multiples.

That is why MP Materials showed up on our screen. Its high returns, essential position in high technology, and low valuation make it a great FA Alpha 50 name.

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The pace of innovation is at its all-time high.

As countries and companies understand that the key to high profitability in the future is spending on research and development now, they are taking the necessary steps.

In fact, not only is the gross spending on R&D increasing, but the allocation of spending also changes in innovations’ favor.

OECD countries’ gross spending on R&D reached $1.6 billion in 2021 and has been increasing since.

R&D spending as a percent of GDP was around 2.1% for most of the last two decades. We saw that ratio jump above 2.7% for OECD countries, the highest it has been.

This is why we are seeing an increasing number of new solutions in various areas.

High-technology products and services are changing our lives: healthcare is constantly transforming, there is a new payment system every day, and we are casually sending rockets to space.

Many of these high-technology products require something very scarce nowadays, which is what MP offers.

Rare earth materials are indeed rare. That is why they are so expensive. Nevertheless, technology companies need them to make all kinds of stuff, from smartphones and LED lights to nuclear batteries.

MP Materials (MP) is the only major rare earth mine operator in the Western Hemisphere. It owns and operates Mountain Pass Mine to produce those highly-demanded materials.

Their position gives them incredibly strong competitive advantages. Nearly all of the rare earth material producers are in Eastern Asia.

So if you need those materials in your U.S. or Europe facility, it is a lot easier for you to get them from MP.

MP has been benefiting immensely from that. Its Uniform return on assets (“ROA”) has surged since it became public in 2021.

The firm’s ROA was -2% in 2020 and expanded to 42% in 2022.

As R&D spending continues its trend and we develop more high-technology products, the demand for rare earth materials will only increase.

And MP Materials literally has no competition near it…

However, the market is stubborn to ignore the story. The company’s stock trades at a 4.2x Uniform price-to-book (“P/B”) and 20.3x Uniform price-to-earnings (“P/E”).

For a company that is sitting on a mine essential to high-technology products, these multiples seem disappointing.

The market fails to realize the role this name is playing in innovation.

That is why MP Materials showed up on our screen. Its high returns, essential position in high technology, and low valuation make it a great FA Alpha 50 name.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click here.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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