Decoding the hype around lithium shares


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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'll look at this 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.

decoding the hype around lithium shares

The lithium carbonate futures price chart tells an interesting story, especially given all the hype around lithium in recent years.

Why are lithium prices falling?

The last thing most would have expected is that the price of lithium has fallen 75% in the last 12 months, but the good news is that any market that has fallen heavily is worth investigating. So, 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new and better ways to produce and store electricity, especially in the renewable energies space, so the risk of being superseded by a new technology, such as sodium for example, is a major concern for the commodity.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% or more from their all-time high, except for Pilbara minerals.

Pilbara happens to be the largest player in this space and has risen more than 4000% since the March 2020 low. More recently, it has only fallen 35% 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 are the best and worst-performing sectors this week?

The best-performing sectors include Financials, Utilities and Healthcare, which are all just in the green for the week.

The worst-performing sectors include Materials and Energy, down more than 2%, and Consumer Staples, down under 2%.

The best-performing stocks in the ASX top 100 include AGL Energy, up more than 7%, followed by Worley, up more than 5%, and Harvey Norman, up more than 4%.

The worst-performing stocks include Santos, down more than 7%, and Whitehaven Coal and Newmont, down more than 6%.

What's next for the Australian stock market?

This week, the All Ordinaries Index reversed its recent rise to fall around 1% as of writing.

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 this week makes me think that February will be a flat month, as I mentioned last week.

This week saw the commencement of reporting season, and so far, more than 50% of companies that reported beat expectations while only 15% missed their mark.

That means more than 80% of companies were either in line or beat expectations, which is a fantastic result.

Some of the companies that have reported are in the property sector, and I would 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 have a much greater impact on 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.

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Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.