What’s up with lithium?
I don’t know. But the share prices of two of the biggest producers on the ASX, Orocobre [ASX:ORE] and Galaxy Resources [ASX:GXY], don’t look too healthy right now.
This is a concern, given all the hype surrounding lithium lately. Lithium is one of the main ingredients in lithium-ion batteries. Telsa has made these batteries ‘hot’ by revolutionising the electric car market (the cars run on lithium-ion batteries) and the home energy storage market.
There is huge growth envisioned for energy storing batteries. Hence the lithium craze. So why are these lithium producers’ share prices falling?
What’s happening to ORE’s and GXY’s share price?
ORE’s share price is down 5% today. Since peaking at $5 in late January, the stock price is down a whopping 46%. Check out the chart below:
GXY’s share price decline isn’t quite as bad. It’s down 36% from its January peak. Check out the chart below:
If the sector is so hot and has such long term promise, why are these leading producers suffering such a hefty share price declines?
What now for ORE and GXY?
It comes down to valuation. ORE trades on a price-to-earnings ratio of 28 times forecast earnings for 2017. That’s a hefty multiple for a stock that made a loss in 2016 and downgraded full year production for 2017 a few weeks ago. In other words, the growth promise isn’t living up to the hype.
GXY’s valuation is a little more realistic. It trades on 11 times forecast earnings for 2017. However the company hasn’t yet demonstrated that it can turn a profit from its operations.
Given this combination of weak fundamentals and a weak charting picture, I’d be avoiding these lithium plays for the time being. When a market is supposedly ‘hot’, yet its two main producers are struggling, it’s time to be wary.
Never assess a stock’s fundamentals without looking at the chart too. Combining fundamental analysis with charting can yield powerful results.
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Editor, Money Morning