Has the Lithium Bubble Burst or Is It Just Leaking Rarefied Air?

Over the last couple of years lithium producers and miners have enjoyed a parabolic jump in their stock prices and market caps. As I will later illustrate, much of the gains for lithium related companies have come as a result of the “hype” surrounding electric automobile development. Of course, Tesla has been the primary instigator of this “hype”type, followed by mainstream automotive manufacturer’s initiatives in all electric and/or hybrid automobiles.

Personally, my assessment of the lithium industry is generally bullish long-term. Consequently, I believe that investing in carefully selected lithium companies at appropriate valuations could represent a compelling long-term investment opportunity. On the other hand, I never see value in positioning yourself as the “greater fool.” For those not familiar with this term, it suggests that you foolishly pay more for a company than it’s worth on the basis that a “greater fool” than you will soon come along and be willing to pay you more in the future.

Therefore, the seminal question I will attempt to answer with this offering is straightforward. Has the recent drop in lithium stocks brought these companies down to attractive valuation levels? As a general statement, most lithium stocks are significantly off their previous highs. Consequently, I have begun to see a rash of articles suggesting that this recent selloff in lithium stocks has produced a buying opportunity. Since the drops were pretty significant and over a short period of time, it appears logical that attractive valuations have recently manifested.

The Principle and Importance of Valuation

Before I go on, I want to be clear that this article is not intended to denigrate or criticize the works of other contributors. Instead, my primary motivation for producing this article is because this lithium scenario offers me the opportunity to point out and illustrate a quintessential example of both the dangers and risks that high valuations create. This is consistent with my plans for producing articles that elaborate on and demonstrate sound value investing principles as articulated in my January 18, 2018 blog post found here.

The primary sound investing principle that the following FAST Analysis video will clearly illustrate is that not all price drops are the same. Implicit in this analysis is what I consider the undeniable reality that there are major differences between an attractively valued company with strong fundamentals that experiences a significant price drop versus the price drop of a significantly overvalued company with strong fundamentals. My contention is that the former likely represents a strong buying opportunity, whereas the latter may or may not. Most importantly, I believe this distinction is critical towards controlling risk and generating adequate long-term returns commensurate with the risk you are taking.