AREC: American Resources is a Great Momentum Stock, But Has it Come Too Far Too Fast?

American Resources Corporation (AREC) is a socially responsible company that deals in the supply of raw materials, such as metallurgical coal and pulverized coal, for the global infrastructure marketplace.

The company’s unique business model in the fossil-fuel field has caught the eye of investors, and its shares have gained 349.2% over the past year.

AREC also has an indirect exposure to the battery design industry for electric vehicles, making it a highly sought-after stock.

Click here to check out our Infrastructure Sector Report for 2021

Here’s what we think could shape AREC’s performance in the near term:

Commercialization of Rare Earth Subsidiary

This month, AREC announced plans to build a 2kW rare earth processing electrolysis facility as part of its commercialization of rare earth technology process chain plans. The electrolysis facility will be designed based on acquired technology and patents from Ohio University in February.

AREC’s plans to commercialize rare earth metals are expected to be of great importance in the long term, given its broad application in the production of electric vehicles. With most rare earth elements concentrated in China, this development should place AREC in the forefront as the EV boom continues.

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Click here to checkout our Electric Vehicle Industry Report for 2021

Stake in the SPAC Bubble

AREC has an indirect investment in blank check company American Acquisition Opportunity Inc. The American Acquisition completed its IPO yesterday, listing 10 million shares at $10 per share, giving the company a pre-market valuation of $100 million. American Acquisition Opportunity, Inc. was designed for an exclusive SPAC deal.

Companies have been rushing to jump on the SPAC bandwagon, which has effectively created a bubble of shell companies in the market. According to a recent New York Times article, SPAC deals raised approximately $26 billion in the United States alone in January 2021, setting records. Bloomberg Wealth cites a 320.3% year-over-year rise in the number of SPACs to 248 in 2020, raising more than $80 billion. Goldman Sachs chief executive SPAC underwriter David Solomon noted that the January SPAC boom is not sustainable in the near term.

SPACs are extremely risky because they bypass some traditional IPO requirements , thereby limiting investor knowledge before the merger. While AREC has soared since the SPAC news was publicized, the effect of the blank check company’s IPO on AREC have yet to be determined.

Stretched Valuation

In terms of its forward price/sales ratio, AREC is currently trading at 4.30x, 217.8% higher than the industry average 1.35x. Its forward ev/ebit and ev/sales multiples of 27.28 and 280.60x, respectively, are significantly higher than industry averages.

Consensus Rating and Rice Target indicates potential downside

AREC has an average broker rating of 1.75, indicating mixed analyst sentiment. Of two Wall Street Analysts that rated the stock, one rated it Buy while one rated it Hold.

However, AREC stock is expected to decline 25.9% in the near term to hit $3.75.

Unfavorable POWR Ratings

AREC has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

AREC has an F grade for Value and Stability, and D for Quality. The stock’s relative overvaluation and negative beta justify its Value and Stability grades. Also, the company’s ROTC and ROA are negative, in sync with the Quality grade.

Among the 10 stocks in the F-rated Coal industry, AREC is ranked last. In addition to the grades we’ve highlighted, one can check out additional AREC Ratings for Momentum, Sentiment and Growth here.

There are two stocks in the Coal industry with an overall rating of B. Click here to view them.

Bottom Line

AREC’s commitment to developing its rare earth business segment and its socially responsible business model have been driving the stock over the past year. However, AREC has yet to build its reputation in the highly competitive EV supplier space. Also, due to its stretched valuation and declining profitability, we think the penny stock is best avoided now.

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AREC shares were trading at $3.87 per share on Tuesday afternoon, down $0.33 (-7.86%). Year-to-date, AREC has gained 98.46%, versus a 4.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...