Interesting story in the Australian today. End para very interesting :-
Australia’s junior resources stocks are in the middle of an absolute frenzy.
Not since the once-in-a-lifetime China boom was in full swing has the appetite for speculative plays of almost any size, colour or shape been as strong as it is right now.
The average return on a small-cap Australian listed resource stock this year is 63 per cent, according to Bloomberg data. At least four stocks are up more than tenfold so far this year, namely AVZ Minerals (up 1790 per cent), European Cobalt (1680 per cent), Australian Mines (1520 per cent) and Artemis Resources (1270 per cent).
The run has created billions of dollars in new paper wealth, and the sort of incredible share price gains that can allow the canny (or lucky) day trader to contemplate an early retirement.
But it has also prompted some observers to warn that the market may have run too hard, too early, and could well end in tears.
Alto Capital fund manager Tony Locantro, who has spent almost two decades advising and trading in small-cap and speculative stocks, describes the current market for small caps as madness.
“The risk here is you’ve got lithium going, you’ve got graphite going, you’ve got cobalt going, you’ve got conglomerate gold going, you’ve got software as a service stocks going. There are multiple bubbles going and I just don’t think there are enough new buyers to sustain the gains,” he told The Australian.
“And as soon as we start to see the correction in markets that is overdue, I think it’s going to get ugly. A whole lot of traders will get wiped out.”
He has seen investor behaviour like this before, for example during the dotcom boom and bust, but this time around the hype around certain junior stocks have been amplified by social media and internet chat forums that connect small traders and feed the frenzy.
“It comes every cycle, quick buck artists come in and trade, they’re all looking at the same stocks, and then when momentum sways they all panic and it starts to get nasty,” he said.
“The electric vehicles thematic will play out, but once the enthusiasm dies down, and it will, the companies without fundamentals get found out. And unfortunately that’s most of them.”
One long-time observer of the junior sector — who did not want to be named — said signs of irrational exuberance came to the surface during the recent Melbourne Cup carnival.
“Put it this way: if you look through Twitter or Instagram, there were way too many small-cap investors posting pictures of themselves getting choppers to the races,” he said. “That’s as good an indicator as any that things are getting out of control.”
Last week saw many of the most frenetic stocks start to fall.
The Pilbara gold conglomerate stocks — which have soared in recent months amid expectations that the region could host massive previously undetected deposits of gold nuggets — all started to cool, led by Artemis and De Grey Mining (both down more than 20 per cent over the week). Australian Mines, which owns the Sconi nickel-cobalt deposit in Queensland, dropped more than 25 per cent to unwind some of its recent gains.
Rather than signal the start of a bloodbath, Far East Capital’s mining veteran Warwick Grigor said the falls looked more like profit-taking after a very strong recent market.
The correction, he said, should provide an opportunity for those who have been sitting on the sidelines to enter the market as “FOMO” — the fear of missing out — takes hold.
“That is the stage of the market cycle that we are entering now. The pendulum has swung in favour of a rising market and this will suck more buyers into the game,” Mr Grigor said.
“The search is on for fundamentals to justify the psychology, not the other way around.”
Eddie Rigg, the head of corporate finance at Perth-based boutique broker and adviser Argonaut, is a big believer in the battery materials story that has driven many of the runs and believes there is still plenty more upside to come. Mr Rigg recently met with 25 institutional funds on the east coast and noted that they were all looking to increase their exposure to the junior end of the market. “Every fund we spoke to has either recently set up a micro-cap fund or is in the process of setting up a micro-cap fund,” he said.
GLTAH
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