These are my many reasons why there is no hurry to buy lithium stocks
1. A sector that is underperforming badly while the equity market continue to make all time highs isn't a sector you can have confidence in. The Sprott Lithium Miners ETF (LITP) is down -23.96% the past month while S&P500 is up +3.43%. Over the past year S&P500 is up +24.82% while LITP declined -58%. When the S&P500 finally corrects, lithium miners are not going to see a reversal of fortune, they will follow the S&P500 lower, and probably by even more.
2. The current macro outlook is one of uncertainty, with prospects of US recession is a possible outcome as the Fed stays higher for longer on rates. Auto and EV demand is already on the nose and a recession would certainly impact the auto and EV industry and accordingly lithium very badly. It is therefore better to wait another 6 months to determine where the economy takes us.
3. The main reason why lithium stocks have taken a sharp decline over the past weeks is because analysts have downgraded prospects for a 2H 2024 lithium price recovery. Previous expectations that EV demand growth must necessarily result in higher lithium pricing proved to be not only elusive but incorrect assumption. As the bulk of EV growth came from China's domestic market, lithium demand is mainly from China and the market still needs to contend with oversupply inventories and lithium supplies that the two top EV battery maker (CATL & BYD) can procure from their vertically integrated lithium mines. As China dominates the EV market and US/EU auto makers backed down from an earlier ambitious EV plans, China would likely continue to command large influence on lithium pricing for at least a year or more. EV growth will continue albeit at a lower pace but lithium price would likely stay lower for longer.
4. Lithium price may have bottomed but not lithium stock valuation. There is a big difference between the two. Even if SC6 scales higher to US$1400/MT from US$1100-1200 now, PLS is trading at a 2025 PE multiple of 42x while LTR would be at 2025 PE of 2ox [79x @$1200/MT] while US based lithium stocks have been marked down to PE under 10x to early teens.
5. The adverse macro outlook continue to provide grounds that embolden large shorts on the larger lithium stocks. As much as you may hate shorters, their presence and actions only serve to either suppress or cap short term price appreciation prospects which makes poor risk:reward. When macro improves, you'd expect the shorters to cover their shorts and then that would be tailwinds for the stock to move higher. Until then, only the committed stale bulls are doubling down on price weakness, while it makes logical sense for new buyers to remain on sidelines until the downtrend changes course.
6. There's two reasons why lithium stock carnage has not bottomed yet. First, exuberance over lithium stocks continue to be fairly resilient and robust despite the 'beat-up'- this may be due to the false sense of security about EV growth and that EV would become mainstream in due time. But as we saw with gold stocks after the end of the gold rally, gold stocks stayed subdued with little interest for an extended time, we have to see the same bottoming process that we have yet to see in the lithium space. Second, we are still seeing lithium IPO, latest is the upcoming Cleantech Lithium.
7. And finally as has been covered quite extensively under my Its Over thread, we are getting to a point similar to the 2000 dot.com peak where we continue to see equities making all time highs with narrow breadth and concentration of interest around the top few stocks, in the present time NVIDIA. The US market is clearly overstretched in valuations and reaching a level that won't likely to stay sustainable soon. Hence this is not just the wrong time to participate in a sector experiencing downtrend but to avoid equities altogether. A wait for another 6 months or more at least would likely pave way for clarity in direction as well as potentially cheaper valued lithium stocks. If a sharp recession occurs, you would not be interested in buying lithium stocks anymore. For much longer, at least.
