Date: January 21, 2025
By: Philip MacKellar
It is that time of year again – everyone wants top stock picks for 2025 as they prepare for the year ahead. Neo Performance Materials NEO-T is my top Canadian pick for 2025. The corporation trades on the TSX, is headquartered in Toronto, and has a market cap of around $330-million. Here at Contra the Heard Investment Newsletter, our average purchase price is $7.41, and we initiated our position in January, 2024.
For those new to the name, Neo Performance Materials processes rare earth metals, magnets and magnetic powders. These products are used throughout the economy in everything from lighting and petroleum refining to medical imaging and wireless technologies. Additionally, its products are important for electric vehicles, energy storage, and represent the backbone of the renewable energy shift. This makes NEO a play on economic growth and the energy transition.
The organization is making the most of the energy transition by rationalizing its operations in China. In recent months, it divested older facilities within China and opened a modern plant in September. The construction and commissioning occurred on time, on budget, and positions NEO well to benefit from future growth.
Neo Performance is expanding in Europe as well. The company is building a magnet facility in Estonia. So far, the construction is also on time and on budget, with commissioning expected this year. Once the plant is operational, it will produce enough material for 1.5 million electric cars annually before scaling to produce enough material for 4.5 million cars a year. This plant should drive significant sales and earnings appreciation, and the market should start to better value this asset now that the first phase is near completion.
Neo Performance could benefit from geopolitical tensions as well, between the Europeans and Americans on one side and the Chinese and Russians on the other. It is one of the few downstream rare earth manufacturers with operations outside of China. This could be important if the Western world’s rivalry with China heats up or if President Trump ignites a trade war. The market got a taste of what this could be like in
In early December, when China announced an export ban on gallium, germanium, and antimony to the United States; NEO’s stock jumped 10.1 per cent on the day of the announcement. Though the ticker has tumbled since, the business should be a benefactor of this decision, and this temporary spike could be a whiff of what is to come.
Geopolitics and the energy transition aside, the enterprise is strong. The balance sheet is robust, and the C-suite has run the finances conservatively for years. Neo Performance holds more cash than debt, has a current ratio around 2.6 to 1, and the share count has been flat since 2017. It has also paid a dividend since 2018, and free cash flows are generally in the green. This cash flow metric suggests management knows how to price their products and make ends meet.
The stock is cheap, too. The shares are trading at a significant discount to its five-year average on a variety of metrics, including price to book, price to sales and EV/EBITDA. Moreover, the dividend yield is around 5.2 per cent versus a long-term average closer to 3.5 per cent. The board has initiated a share buyback, and the stock is so cheap that it started a strategic review in mid-2024. This review may not yield material results, but it could unlock value via asset divestments or even the sale of the company. It is also worth noting the analyst community considers it cheap. All four analysts covering the name rate it as a buy, and the average 12-month price target is $13.36, far above its closing price Tuesday of $7.80.
Finally, insider alignment with other owners is high. The organization is supported and over 20-per-centowned by Australian rare earth miner Hastings Technology Metals HSRMD. In the past 12 months, NEO executives and directors have purchased $658,000 in stock and have not sold a penny. Insider buying is normally a bullish signal, and, in this case, the buying has increased the ownership stake of insiders to around 1.5 per cent.
All investments carry risk, and Neo Performance is no exception. Though it has a huge footprint outside of China, it clearly operates within the country as well. These sites could be impacted if a trade war goes into overdrive or if there is an armed conflict over Taiwan. Its magnet project in Estonia is in a town called Narva, which borders Russia and is 87-per-cent-ethnic Russian. If Vladimir Putin is successful in Ukraine and NATO fractures, Narva could top Mr. Putin’s invasion list. Even without that possibility, Neo sources some materials from Russia, which could be caught up in sanctions. Finally, a global economic downturn or a further delay in the adoption of electric vehicles could hurt the company.
Risks and all, the stock has great growth drivers, is a way to own a bit of the future at a reasonable price and is one of my top picks for 2025.