Lithium is down 75%: Is Now the Time to Buy Lithium Stocks?

There is no doubt that lithium is a hot topic right now, especially when there are images of exploding scooters, EVs and other similarly powered devices in the news every week. However, lithium is more than something that is just prone to spontaneous combustion, so this week, we look at this highly popular and, dare I say, hotly debated topic.

I will also review some Australian lithium stocks to determine whether there are any real opportunities right now or if all the talk is just another overhyped story best left for discussions around the dinner table.

The lithium carbonate futures price chart tells an interesting story, especially given all the hype around lithium in recent years. The last thing most would have expected is that the price of lithium has fallen 75 per cent in the last 12 months, but the good news is that any market that has fallen heavily is worth investigating.

Why is Lithium popular yet falling heavily?

Lithium is used in many industries, including electric vehicles and energy storage systems, and we all know that the world is moving towards an all-electric future. As such, the potential gain from holding lithium stocks is well warranted, especially since experts such as Statista are forecasting global lithium demand will surpass 2.4 million metric tons, doubling the 2025 forecast. Bloomberg also predicts a nearly fivefold increase in lithium demand by the end of the decade.

The challenge for lithium is that we are constantly finding new and better ways to produce and store electricity, especially in the renewable energies space, so the risk of being superseded by a new technology, such as sodium for example, is a major concern for the commodity.

It's not the first time I've seen a market move in the opposite direction to the hype, and right now, lithium stocks are down 70 per cent or more from their all-time high, except for Pilbara minerals.

Pilbara happens to be the largest player in this space and has risen over 4,000 per cent since the March 2020 low. More recently, it has only fallen 35 per cent from its all-time high, which suggests there is strong interest in this stock.

If the price of lithium catches up to its hype, Pilbara is one stock you should take a very close look at, especially if you want exposure to this commodity in your portfolio. As for the other stocks in this space, I would stay away until the price of lithium is well and truly rising; otherwise, you might just be catching a falling knife.

What were the best and worst-performing sectors last week?

The best-performing sectors included Healthcare, up 1.32 per cent, followed by Information Technology, up 0.91 per cent and Financials, up 0.73 per cent. The worst-performing sectors included Energy, down 3.44 per cent, followed by Materials, down 3.03 per cent and Consumer Staples, down 1.73 per cent.

The best-performing stocks in the ASX top 100 included Worley, up 5.83 per cent, followed by Harvey Norman, up 5.58 per cent and Virgin Money, up 5.03 per cent. The worst-performing stocks included Whitehaven Coal, down 8.67 per cent, followed by Santos, down 7.34 per cent and Newmont, down 7.04 per cent.

What's next for the Australian stock market?

Last week, the All Ordinaries Index reversed its recent rise to fall 0.59 per cent. While I still believe the Australian market will push higher to take out the all-time high in the next week or so, the reluctance to break the all-time high last week makes me think that February might be a flat month, as mentioned in my previous report.

Last week saw the commencement of reporting season, and so far, more than 50 per cent of companies that reported have beaten expectations, while only 15 per cent missed their mark. That means over 80 per cent of companies were either in line or beat expectations, which is a fantastic result.

Some of the companies that reported are in the property sector, and I encourage investors looking for clues as to the direction of future interest rates to take a close look at their reports. Most notably, Mirvac reported a statutory loss to the tune of $165 million, and if more property companies follow suit, then the RBA may act sooner to reduce interest rates.

I would also encourage you to keep an eye on the big players, including BHP, RIO, and the big four banks, as their results will greatly impact the broader market. Remember, reporting season creates heightened volatility and wild swings in price both up and down. That said, I suspect reporting season will produce many opportunities for traders to take advantage of, so keep an eye on your favourite stocks.

I believe patience is the order of the day for at least the next few weeks until reporting season ends. While the Australian market may well be bullish over the next few weeks and break above the all-time high, it could also move up and down like a yoyo, which is typical for February.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.