April 2, 2018
We recently conducted a poll on twitter (shown below) to gauge sentiment among our followers. The lopsided results intrigued us enough to warrant a post on the continued market selloff. We’ve spoken extensively on the selloff and its causes, but we want to assess where the market is, and how investors are currently viewing things. While our poll includes a small sample, the results begin to help us determine what informed investors believe.
We wish it were still April fool’s day, but unfortunately today’s selloff was for real. Continuing on a downtrend that started back in February, stocks were red across the board. Looking specifically at the lithium mining sector, the majors SQM, FMC and ALB were down 2.3%, 2.08%, and 4% respectively, with the latter breaking below the $90 level where it looked like the stock would find support. Similarly junior miners continued their declines as well. Nemaska Lithium, which has been very volatile over the last week after their financing update, was down more than 5%. Lithium Americas was also down over 5%, and has now given back almost all of the gains it saw in the Q4 rally. Finally we’d like to note that Aussie juniors like Pilbara, Altura, and Tawana didn’t follow suit just yet given that today was the Easter Monday market holiday for ASX listed stocks.
Information Gap and Who to Follow?
Starting at a high level- as we’ve noted before, there was a large number of investors looking at the space on the back of supportive EV regulations, and lithium shortage headlines throughout 2017. Once the SQM/Corfo news broke, Morgan Stanley turned bearish, and recent volatility hit the market, many of these participants (including in our opinion, larger investors) headed for the exits as they believed the lithium story was just another bubble phenomenon. We believe these shorter term oriented traders, and less informed investors have led us to the downside, creating a second chance buying opportunity in the lithium space.
So with lithium stocks now down anywhere from 30-50% off all-time highs, is it time to panic? Well as we see above, our followers certainly aren’t ready to throw in the towel. 73% of voters said they are buying on these dips, while only 1% (or a measly 1 vote) said they are looking to go short. While the results of this poll directly contradicts what we wrote in the previous section, we should note that many of our readers are in tune with the lithium story and the markets that fuel their favorite mining stocks. As such, it’s not surprising that the results turned out this way when polling more informed, or longer term lithium investors.
This brings us to our final question- which group should you follow? At The Lithium Spot, we strive to ignore the noise and reassess our own research and analysis. Everything we’ve seen in our analysis, and our conversations with customers, suppliers, miners, etc. tells us that the market and certain sell-side analysts, are not fully grasping the fundamentals driving the lithium mining industry. We haven’t seen any negative changes to our supply/demand outlook, nor have we seen any negative dynamics affecting some of the companies we are bullish on. In a situation like that, we lean towards the side of our followers and look to add to our positions on dips.
Value and Growth Converge
It’s no secret that we like Lithium Americas, so getting them for 50% off is a bargain in our book! Similarly, Pilbara, who is entering production this year, is now trading at only 8x 2019 consensus EBITDA. The list goes on and on, but our point is that the lithium market is offering a second chance buying opportunity for long-term believers in the story. And at current levels, we would argue that valuations are low enough for value oriented investors, while providing the growth potential of growth stocks.
On a final note, while we’ve been proponents of buying on the dips in the past, we fully acknowledge that we might not get a snap-back rally. In fact, there’s probably a good chance that we won’t see that. But our point is that’s okay. Once we find high-quality stocks, we keep them on our watchlist and wait for them to become undervalued if they aren’t already. Big selloffs like the ones we’ve seen recently (including today) are a blessing and allow us to embrace the volatility by building larger positions in these companies. Over the long run, we believe the hard work and patience should pay off for disciplined investors.
Disclaimer: We own Albemarle, SQM, Lithium Americas, Pilbara Minerals, Altura Mining, and Nemaska Lithium. This post is not investment advice. Readers should do their own research before investing.