Proactive Investors
Published Oct 03, 2023 12:59
Updated Oct 03, 2023 13:15
Bull case for lithium stocks: how investors can ride out market volatility, Buffett-style
Proactive Investors - The lithium carbonate price last week touched a low of just under $23,000 per tonne and has since languished at the bottom of the curve. This marks a 50% decline in value since June, while the cost of the silvery alkali metal used in electric vehicle (EV) batteries has plummeted 72% over the past 12 months.
The primary culprit is China, where demand has waned amid a challenging economic landscape. An expected resurgence, fuelled by the electric car sector, has yet to materialise, leading analysts and investors to ponder: What's next?
Indeed, the repercussions extend far beyond the sector itself. For those who have invested in lithium stocks or exchange-traded funds (ETFs) since the beginning of the year, it has been a harsh lesson in market volatility. The table below narrates its own tale.
For some novice investors, what appears to be a significant problem could also offer a considerable opportunity for those who view the aforementioned stocks and ETFs as undervalued. Thus, we enlisted AI to address two questions:
Are the market fundamentals still robust (in other words, does the long-term bullish narrative still hold)?
If the answer to the first question is affirmative, which lithium stocks would esteemed value investor Warren Buffett likely purchase today?
The Bull Case for Lithium Stocks
Despite recent market softness, a compelling case exists for investing in lithium stocks. Demand for lithium is projected to surge in the coming years, propelled by the growing adoption of EVs and other renewable energy technologies. According to a report by Benchmark Mineral Intelligence, global lithium demand is anticipated to rise from 700,000 metric tonnes in 2022 to 3.2 million metric tonnes by 2030, representing a compound annual growth rate (CAGR) of 26%.
Several factors are driving this growth in lithium demand:
However, it's prudent to consider the risks associated with investing in lithium—chief among them being market volatility. Prices can experience significant fluctuations based on market conditions, as evidenced by the recent downturn.
Another concern is the potential for lithium oversupply. Several new lithium mines are slated to commence operations in the coming years, potentially leading to market saturation. This could exert downward pressure on lithium prices, thereby affecting miner profitability.
Buffettology in Action
Warren Buffett, the Sage of Omaha, is a value investor and a disciple of Benjamin Graham. He seeks companies trading below their intrinsic value with a robust competitive edge. Unlike Graham, Buffett also values companies with strong management teams and those poised to capitalise on long-term trends.
If Buffett were to assess the current lithium market, he would likely target companies undervalued relative to their intrinsic worth and possessing a strong competitive advantage. He would also consider companies with proficient management teams and those well-positioned to benefit from the long-term uptrend in lithium demand.
Here are some specific criteria Buffett would likely evaluate:
It's crucial to note that Buffett is a long-term investor, willing to hold stocks for an extended period. He believes that the optimal strategy for superior returns is to invest in high-quality companies at reasonable prices and hold them for the long term.
Investors contemplating lithium stocks should carefully assess their investment objectives and risk tolerance. Lithium stocks are inherently volatile and may not be suitable for all investors.
Stock Recommendations
Here are three lithium stocks that AI identifies as trading below their intrinsic value:
These are mainstream large-cap picks that anyone with a cursory knowledge of the lithium sector might identify. Below are five more that require deeper research to unearth.
Read more on Proactive Investors CA
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Written By: Proactive Investors
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