Chocolates, the word itself is enough to elevate the mood because almost everyone loves them. Therefore, along with sweetening the taste buds, we have searched for a trade that is likely to sweeten the portfolio in the medium-term.
- Cocoa prices are quoting near multi-year lows due to over supply
- Demand for cocoa products, however, remains strong
- History shows that cocoa production is cyclic in nature
- The top two producers are taking steps to support prices and avoid a glut in the future
- The risk to reward ratio looks attractive for a long-term trade
Cocoa, the main ingredient in chocolate making is quoting near its yearly low. However, we believe that the bottom is in place and cocoa is likely to rally in the medium-term.
What are the uses of cocoa
Cocoa is derived from the cocoa bean and has a history of more than 5000 years. Cocoa is mainly used for making chocolates and its derivatives, something that everybody loves.
So, when cocoa is used for making such a popular product, why is its price quoting near yearly lows?
Price of every commodity is determined by the dynamics of demand and supply. In the case of cocoa, let’s see whether people have suddenly started disliking chocolates or are farmers growing cocoa in large quantities, causing a supply glut.
Chocolate consumption and cocoa production details
The retail consumption of chocolate confectionery globally has seen a gradual uptrend from about 6.946 million tons in 2012/2013 to about 7.3 million tons in 2015/2016. The growth is likely to continue and consumption is expected to reach 7.696 million tons by 2018/2019, according to Statista.com. Between 2007 to 2015, the chocolate market had a compound annual growth rate (CAGR) of +2.3%, according to IndexBox.
Who were the major consumers?
In terms of total consumption, US is the clear leader followed by the UK and France. The world’s top two most populated nations, India and China are far behind. This shows that there is enough scope of growth.
But, is there any proof to show that chocolates have attracted new enjoyers other than the traditional consumers?
To understand this, let’s look at the per capita consumption.
Traditionally, Europe has been a large consumer of chocolates. In 2015, Switzerland was the global leader with a per capita consumption of 8.8 kilograms, closely followed by Germany at 8.4 kilograms. However, according to global market intelligence agency Mintel, sales were flat in the US, UK, Germany, and France between 2015 and 2016.
Nevertheless, while the traditional consumers are plateauing, new consumers are warming up to chocolates and its derivatives.
Russia’s cocoa consumption had an annual growth of 18.1% between 2007 and 2015, which has propelled its per capita consumption to 7.3 kilograms, the third highest in the world.
Similarly, the analysts now expect India to provide the next leg of growth. From 2015 to 2016, India’s chocolate confectionery in retail markets grew by 13%. It is not a one-off growth number because between 2011 to 2015, India recorded a CAGR of 19.9% and the growth is only expected to improve to a CAGR of 20.6% between 2016 to 2020, according to Mintel.
So, it is safe to assume that the growth in chocolate sales is likely to continue for the next few years. Now, let’s look at the supply picture.
Who are the major suppliers of cocoa in the world?
While cocoa consumption is a feature around the world, the production is concentrated in West Africa, which produces about 70% of the world’s cocoa. The world leader in production is Côte d’Ivoire, which alone produces about 30% of the total global production.
The next largest producer is Ghana, which accounts for above 20% of the world’s cocoa production. Third is Indonesia, which is comparatively a newcomer to the group. However, its farms are being infested by the ‘pod bearer insect’, which has resulted in poor roots and poor-quality cocoa bean, severely limiting their rise as a cocoa superpower.
Cocoa bean production over the past decade?
Similar to the consumption of chocolates, cocoa production has increased sharply over the past decade. However, the rise has not been constant. 2010/11 and 2013/14 were bumper years, which were followed by a dip in the following two years.
Including the forecast for 2016/17, there have been five years when production increased, while production fell in the other five years. Nevertheless, the percentage of rise during the up years has been greater than the fall during down years, therefore, production has more or less kept up pace with the increased consumption of cocoa-based products.
The cocoa market keeps shifting from surplus to deficit, as seen in the chart above. Therefore, it is safe to assume that the markets will again fall into a deficit, which will be bullish for cocoa prices. Let’s see the supply and consumption pattern for this year.
So, what is the latest demand and supply situation?
In 2016/17, the International Cocoa Organization expects the global production to increase sharply over 2015/2016, contributing to a global surplus of 371,000 tonnes. A bumper crop in West Africa is likely to keep prices depressed in the near term. Ivory Coast’s bean arrival at the ports from the start of the season to August 20, was 12.6% higher than the previous year.
As a result, Rabobank believes cocoa prices are unlikely to rally a lot above $2000 per MT in the short-term, however, they are bullish in the long-term due to increasing demand.
“The further we go in time, the more bullish our forecast gets,” said Carlos Mera, a commodities analyst with the bank, reports confectionerynews.
In September, the ICCO said: “Major chocolate manufacturers have generally reported improved sales volumes and the low international cocoa beans price is anticipated to encourage cocoa processing activities.”
The sales of candy in the US was up 1.4% year over year and the trend was showing signs of improvement, as the latest four weeks sales increased 2.8% year over year, according to IRI/Bloomberg Intelligence, the Morningstar reported on August 25.
Low prices are pinching the major producers
Ivory Coast and Ghana, which account for over 60% of the global supply of cocoa are struggling due to the fall in cocoa prices. Therefore, they plan to build warehouses to stock the beans during bumper crop season and release them in the market, according to the demand, thereby increasing their influence over cocoa pricing.
“Must we continue on this path, flooding the market with beans in abundance and driving down prices to the detriment of our economies and people? We don’t think so,” said Narcisse Sepy Yessoh, chief of staff to Ivory Coast Trade Minister Souleymane Diarrassouba, reports Reuters.
They have sought a loan of $1.2 billion from the African Development Bank for the above activity, which is likely to be approved by the end of this year and the stocking is likely to start in the 2018/2019 season.
This will put a floor beneath cocoa prices in the medium-term.
How does the technical picture look?
The long-term chart of cocoa futures shows a trading range between $1800 to $3400. This is a well-defined range. An attempt to breakout the range failed in 2011, similarly, attempts to breakdown of the range failed between May and July of this year.
The risk to reward ratio to play the range is attractive. We have a well-defined stop loss below the lows of the range, whereas, our target objective is a rally back to the upper end of the range. However, it will be difficult for the readers to hold cocoa futures for the long-term. Therefore, the next best way is to play it through the two available ETNs, NIB and CHOC.
As NIB is more liquid, we prefer to invest in it. Let’s look at its chart.
Unlike cocoa futures, NIB broke below the lows made in end-2011 and formed a new low at $21.17. It has formed a bearish descending triangle pattern, which will complete on a close below the $21.17 levels. Therefore, we shall initiate 50% of our trade when NIB breaks out of the triangle and 50% of the positions on dips. Let’s determine the specific levels from the daily charts.
NIB has fallen below the $22 levels four times since May of this year. The downtrend line has been a major hurdle to cross. On Friday, NIB again returned from the downtrend line. Therefore, if it again falls closer to $22 levels, a long position with 50% allocation can be initiated. The remaining 50% position can be initiated on a breakout of the descending triangle pattern. The positions can be closed if NIB breaks down and closes below 21 for three days in a row. Once NIB breaks out of $27 levels, its next technical target is $33, though its long-term target remains $45.
How have various asset classes performed during previous wars
North Korea, the dictator ruled nation has been threatening the US and its allies with a possible missile attack, which may also have a nuclear warhead on it. The experts are divided on the actual capability of North Korea to undertake the attacks, however, its leader, Kim Jong-un leaves no opportunity to provoke the US and its allies.
- Stocks perform better than average when the conflict starts
- Gold rallies before the start of the conflict
- Bonds have underperformed stocks during previous wars
- The US dollar has fallen on few occasions during a conflict
- The current war, if it starts, can severely impact electronic goods
- The US national debt is likely to balloon if US involves itself in South Korea’s reconstruction after the war ends
Though North Korea’s military prowess is nothing great to write home about, it can still cause extensive damage to millions of civilian lives and the economy of its neighbor South Korea, to some extent Japan and the US territory of Guam. However, in this article, we shall restrict ourselves to the impact of the war on various asset classes and the world economy. We shall use the historical evidence to arrive at our conclusion.
How does the US stock market perform during wars?
The US has fought several wars since 1960 as shown above. While a few ended quickly, others have been a long-drawn affair. Notwithstanding, Barron’s has outlined the effect of the following seven major hostilities on the Dow Jones Industrial Average since early 1980s.
|01||The US invasion of Grenada||1983|
|02||The US invasion of Panama||1989|
|03||The first Gulf War||1991|
|04||The US bombing of Kosovo||1999|
|05||The US War of Afghanistan||2001|
|06||The second Gulf War||2003|
|07||The US bombing of Libya||2011|
The markets hate uncertainty; a proof of this is the average 0.6% drop in the Dow a month prior to the start of the conflict.
However, once the conflict commenced, the Dow quickly turned direction, rising 4% in the first month. The rally did not stop there. Over the next three months, the Dow rose an average 6.7%, and the gains swelled to 7.2% after six months of the start of the conflict.
Therefore, if history repeats itself, a war between the US and North Korea – if it were to happen – will not start the next bear market.
How does gold perform during wars?
Gold is considered as a safe haven during times of uncertainty. Therefore, the yellow metal has rallied from about $1260/toz to about $1360/toz levels, as tensions escalated between North Korea and the US.
But, will gold continue its rally if the war starts?
Economists at Capital Economics have analyzed gold’s performance since 1985, during military conflicts, acts of terror and political tension.
They established that “over the past forty odd years, the price of gold has on average risen by 4.1% in the six months prior to a conflict turning into a full-blown war. However, it barely moved in the months following the event. This makes sense as gold thrives in periods of elevated uncertainty and the start of an armed conflict partly erases that.”
Performance of long-term bonds during wars
Though bonds are also considered as a safe haven investment, their performance has lagged their historical average during wars, according to a study by the CFA Institute. The possible reasons are an increase in inflation during war times and the second is the higher borrowing by the government to fund the war. Due to these two, bond prices fall. Therefore, selling out of stocks and buying bonds fearing a conflict might not prove to be a good strategy. The only aberration was during the gulf war when bonds beat stocks, albeit marginally.
How does the war affect the US dollar?
The evidence of the past three decades shows that the US dollar weakens during war, according to Kathy Lien, Managing Director of FX Strategy for BK Asset Management. The US dollar fell 5% when the Libyan war started and fell 9% during the first three months of the second gulf war. The dollar was weak even during the first gulf war.
However, this time, the situation is more complex and a lot of currency movements will depend on whether China actively involves itself in the war or remains neutral. The Australian dollar, the New Zealand dollar, and the Japanese Yen will see large moves if China supports North Korea directly during the war, else the movement in the currencies is likely to be comparatively subdued.
“As the tensions grow the dollar will suffer and the actual announcement of war could take USD/JPY to 105 but if it’s a swift victory the pair would also recover quickly,” said Kathy.
Though historical evidence gives us some idea about the possibilities, every new war is different because it involves different nations and affects different asset classes.
What sectors will be affected if a war with North Korea takes place?
North Korea, in itself, can’t impact commodity prices. However, it is surrounded by nations that are major consumers of commodities. China is one of the major consumers of commodities, however, it is unlikely that the war will impact China’s consumption materially.
South Korea is a major importer of coal and exporter of steel. Both these commodities will be majorly impacted because South Korea will be severely affected if a war breaks out. Similarly, liquified natural gas prices will be affected, as Japan is its largest importer in the world.
The seaborne trade will also be severely affected because China, South Korea, and Japan receive about one-third of the global seaborne crude supplies. Similarly, 84% of the world’s iron ore and 47% of the metallurgical coal reaches the shores of these three nations through the seaborne route.
The agricultural commodities will also be affected because China is a major importer of rice and soybeans while Japan is of corn.
Economic costs of the war
War has both a direct and an indirect impact on the economy. South Korea is a hub for manufacturing liquid crystal displays, semiconductors, and cars. A war will impact these activities, leading to a shortage across the globe. The alternative suppliers can’t bridge the gap in such a short span of time. Therefore, prices of various electronic products are likely to rise significantly, which will impact the developed economies, including the US.
“U.S. spending on electronic items, including smart phones, cameras, tablets and computers accounts for roughly 1 percent of the consumer price inflation basket. If a war in Korea caused prices of these items to double, it would add 1 percentage point to U.S. inflation,” a report by the research consultancy Capital Economics warned, reports CNBC.
If inflation rises sharply, the Central Banks will be forced to raise interest rates, jeopardizing the fledgling global economic recovery.
Additionally, if South Korea’s gross domestic product (GDP) falls by about 50% due to war, it will reduce the global GDP by 1 percentage point, according to the report.
Once the war ends, South Korea will need huge capital to rebuild its infrastructure. If the US involves itself and ends up spending the same amount as it did in Iraq and Afghanistan, then the federal debt will reach 105% of GDP, the economists at Capital Economics warned.
Though historical evidence suggests that the equity market returns are better than average during a war, the situation might be different this time because of the nations involved. Any jolt to the weak economic recovery across the globe will dent the confidence of the investors. Therefore, we don’t expect the stock markets to rise substantially during the war.
Gold’s performance is somewhat neutral and it can be used to protect the value of the portfolio. Therefore, selling some overvalued stocks and buying gold might be a good strategy if a war seems imminent.
Is this the right time to own Gold?
On August 10, Ray Dalio, chairman and chief investment officer at Bridgewater Associates wrote in a LinkedIn blog post that investors should own 5-10% of their assets in gold. There have been many such calls in the past seven years by different experts, which haven’t been profitable. Therefore, let’s evaluate the conditions and decide whether it’s the right time to invest in gold?
- Gold has is a time-tested asset class
- Gold is a safe haven, though experts have differing opinions
- Any crisis emanating from China, Japan or Europe can see a risk-off trade being taken
- Geopolitical tensions are another catalyst for gold
- The downside is limited and clearly defined
- Buy in a staggered manner as it is difficult to nail the bottom
What is gold’s status as an asset class?
Gold, as a precious metal and as a medium of currency has a very long history. The first known gold coins were used somewhere in 6th century BC, while gold mining is believed to have started at least 7000 years old.
Even in the last century, the world’s major nations were following a gold standard. Many opine that it was the best system and there have been intermittent calls to return to the gold standard to avoid credit bubbles stoked by the central bank’s ultra-loose monetary policies. This shows that gold, as a form of currency or as an asset has withstood the test of time.
Why is gold perceived as a safe haven?
A safe haven investment is one, which retains and sometimes increases in value during tumultuous market conditions when the perceived risky assets lose value. However, the researchers differ in their opinion about gold’s performance as a safe haven investment.
In a study by Baur and Lucey (2010), the authors noted that gold works as a safe haven only for a short time, about 15 trading days and is only effective as a hedge against stocks and not bonds. In another study, Baur and McDermott (2009), found that gold performed both as a safe haven and a hedge against the US and European equity markets but not for the remaining developed nations and the emerging economies.
On the contrary, researchers in Ireland concluded in their paper “Reassessing the Role of Precious Metals as Safe Havens – What Colour Is Your Haven and Why?” that gold acts as a safe haven in turbulent times in many countries. This was because of the low correlation of gold with the other markets, as shown in the table below.
|Gold||MSCI World||MSCI Asia ex Japan||S&P 500||Japan||JPM Global Bond|
|MSCI Asia ex Japan||0.24||0.84||1||0.76||0.65||0.43|
|JPM Global Bond||0.55||0.29||0.43||0.18||0.11||1|
Monthly data from May 2011 to May 2016
Source: Bloomberg and Stansberry research
Gold acts as a safe haven investment during times of political and financial market stress, however, its effectiveness reduces once the markets move towards normalization.
What is the current situation that benefits gold?
We have a political gridlock in the US. It is unlikely that the current administration will be able to push through critical tax reforms or be able to boost fiscal spending to a level that will accelerate growth. If the Fed tightens and takes steps to shrink its massive balance sheet without adequate growth, the stock market is likely to fall.
The central banks kept interest rates low for an extended period and printed astronomical sums of money to drag the economy out of the financial crisis. Many experts believe that the central banks have used up all their bullets, therefore the next crisis will be severe and will last longer. If such a situation happens, gold might be the only place to hide.
Japan and China are sitting on piles of debt. Any major crisis in either nation will be catastrophic and may lead to a risk-off trade, where gold will be a beneficiary.
Also, the heightened geopolitical tensions between the US and North Korea, the trade conflicts with China, the uncertain relationship with Russia, and terrorist attacks can quickly turn ugly, boosting a move towards safe haven investments.
Ned Naylor-Leyland, manager of the Old Mutual Gold & Silver Fund notes that gold completed a golden cross in December of last year. A golden cross is when the 50-week moving average moves above the 200-week moving average. Every time the golden cross has occurred in the past 30-years, it has led to a bullish move in gold that lasted at least for three years, according to Naylor-Leyland. In fact, the last time this occurred in 2002, after which gold embarked on a massive bull run.
What is the downside risk in gold if we are proven wrong?
As seen above, gold can protect your wealth in case of a black swan event. Therefore, keeping a certain portfolio in gold is a good strategy.
The risk is that the investment made in gold will not return a dividend or pay any interest. It will remain as a dead investment until you sell it. The US markets can extend their bull run for a few more years. Under such a circumstance the investment done in gold will be a wasted opportunity. If the risk on trade continues, gold will fall out of favor and may fall.
After understanding the fundamentals, let’s see what do the charts forecast.
What do the charts forecast for gold?
Gold remains in a long-term uptrend. It completed a 50% Fibonacci retracement of the large upmove from $255.1 to $1923.7 and is currently stuck in a range between $1045 on the lower end and $1400 on the upper end.
Gold was similarly stuck in a range after topping out in 1980. Subsequently, gold remained in a trading range for about 21 years, before starting its next uptrend in 2001.
The present consolidation is already in its sixth year. If history repeats itself, gold may remain in a trading range for a long time before starting a new uptrend.
However, the downside seems limited. Therefore, traders can buy gold on dips and sell it on rallies near overhead resistances. All long positions should be protected with a stop loss of $1030.
If, however, the world faces any new financial crisis, gold can resume its uptrend and rally to new lifetime highs. However, it is difficult to pin point when this is going to happen. As many traders don’t want to hold their positions for the long-term, let’s analyze the daily charts for short-term buy setups.
On the daily charts, $1300 is a strong resistance, as gold has returned twice from those levels. On the downside, $1200 is a strong support because gold has bounced twice from these levels. Therefore, a breakout of $1300 will most likely carry gold to the upper end of the larger range to about $1400 levels. On the other hand, a breakdown below $1200 will push gold down to $1120 levels.
However, as gold has been in a range and it has a history of long consolidations after a stupendous rise, long-term traders can invest in a staggered fashion.
First 25% of the proposed allocation can be done at the current levels. If, however, gold fails to breakout, the next 25% allocation can be done at the lower end of the range at $1200. We expect this level to hold.
The final 50% allocation can be done when gold resumes its uptrend. All stops should be kept at $1040 levels.
Our risk is defined, but if the world faces another financial crisis, gold is likely to rally to a new lifetime high.
Lithium Miners can be a Good bet for the Long-Term
Long-term trends, if identified early can be a profitable investment. In such stories, the investor can buy and hold a stock till there is a clear visibility of earnings. One such sector that fits the bill is the Lithium miners. Let’s analyze in detail.
- Electric vehicles will slowly replace the fossil fuel powered vehicles
- As a result, demand for Lithium-ion battery will grow exponentially for the next few years
- There is no replacement for lithium-ion batteries
- Lithium supply is unlikely to keep up with the demand
- Lithium miners will be direct beneficiaries
What are the uses of Lithium?
After debuting 26 years ago in a Sony CCD-TR1 camcorder, lithium-ion batteries have gained widespread use in consumer products, electric vehicles and energy storage.
Last year, lithium-ion batteries equal to a storage capacity of about 45 gigawatt-hours (GWh) were used by the consumer products, according to The Economist. In comparison, the electric vehicles (EVs) only needed about half of the capacity: 25GWh.
However, with the boom in the electric vehicles, demand will increase exponentially. Lithium prices have already doubled in just over a year.
How much demand will the electric vehicles industry generate in the future?
According to Goldman Sachs, EVs will increase their market share from 0.2% of all vehicles sold in 2016 to about 5% in 2030.
However, with advances in technology and price of EVs dropping rapidly, it is likely that the above assumption of Goldman Sachs will be reached much earlier, especially if China and India adhere to their plans.
China wants 12% of all car sales to be from battery-powered or plug-in hybrids by 2020, whereas, India wants all its vehicles to be electrically powered by 2030.
Lithium-ion battery production to skyrocket
Strong EVs sales will stoke demand for the lithium-ion batteries. The top battery manufacturers are gearing up for this challenge by increasing their capacities rapidly. Leading the way is Tesla, with their huge $5 billion gigafactory, which is expected to produce about 4GWh a year from this year. By 2018, Tesla wants to produce 35GWh, a nine-fold jump within two years.
Bloomberg New Energy Finance forecasts lithium-ion battery demand from electric vehicles to increase from 21 gigawatt-hours in 2016 to 1,300 gigawatt-hours in 2030.
Some of the other areas where lithium demand is expected to grow is shown in the table below.
Agreed that the demand for the lithium-ion batteries is going up. But, is there a shortage of Lithium? Will the raw material prices shoot up or is there abundant supply that can push prices down?
Lithium demand and supply
Considering the huge demand for lithium, several projects have been announced that are likely to increase the supply in the near future. However, will this lead to a supply glut similar to crude oil? Let’s listen to some experts in the field.
Joe Lowry, lithium industry consultant and commentator, believes that even with all the new supply additions, “supply shortage will cause significant issues in the battery supply chain by 2023.” (“Lithium Investment at the Crossroads”, July 17, 2017).
Chile’s SQM has been a leader in lithium production for almost two decades. Its Chief Executive Patricio de Solminihac believes that the present demand for lithium is about 200,000 tonnes LCE, which is likely to grow by about 14% per year.
“We believe it is highly probable that worldwide demand will exceed 500,000 tonnes by 2025,” said Solminihac, reports Reuters.
A few analysts, however, believe that lithium supply will overtake demand as soon as next year.
Rebecca Gordon of the UK-based consultancy CRU believes that by 2018, lithium supply will meet demand if all the new projects come online. This will cause a sharp drop in prices from the current levels.
Can the demand stall due to advance in battery technology?
The popularity of electric cars is unlikely to slowdown anytime in the near future. However, is there a technology that can make the lithium-ion batteries redundant or replace them?
Recently, Bill Joy, the Silicon Valley guru and Sun Microsystems Inc. co-founder, announced a new alkaline battery that can compete with lithium-ion and better it in certain areas. Though this is a revolutionary find, it is yet years away from mass adoption. According to Joy, it may take another five years for it to gain wider acceptance.
Lithium-ion battery prices are dropping with new advances in technology. Prices fell 73% between 2010 to 2016. Therefore, any new entrant will find it difficult to displace lithium-ion from its leadership position.
Hence, lithium demand is here to stay, at least for the next decade.
Now, after having established a strong demand growth for lithium, let’s search for a stock to invest in.
What companies do we like and why?
We shall cover two companies in short. If the readers feel that the lithium story is compelling, we shall delve into greater detail in examining these stocks in the future.
Sociedad Quimica y Minera (NYSE: SQM)
Sociedad Quimica y Minera is one of the largest producer of lithium in the world. It is based in Chile, which has the largest lithium resources in the world.
It is a dividend paying company, though the dividend amount keeps varying depending on the company’s profitability. However, with greater demand, SQM is likely to increase its earning and thereby its dividend.
In terms of valuation, the stock is quoting at price/earnings of 35.3, which is way above its 5-year average of 21.7 and the industry average of 21.7.
Nevertheless, with its leadership position and a growing demand, the results are likely to surprise on the upside and the price/earnings multiple will look more reasonable after a few quarters.
What do the charts suggest? Is it time to buy?
SQM was stuck below the $32.8 level for more than three and half years. Finally, the stock broke out of the resistance in March of this year. The stock successfully retested the breakout levels twice and has since then resumed its uptrend. The stock doesn’t have any major resistance until it reaches $59 levels. However, periodically, every stock corrects.
Therefore, at the current levels, we shall only buy 25% of the allocation. Rest 50% should be purchased when the stock falls to the trendline support and the final 25% allocation should be done once the stock resumes its uptrend after a correction. We don’t want to hold the stock if it starts to trade below the $32 levels. That will signal a change in the fundamentals of SQM or the sector as a whole.
The stock can easily surpass its lifetime highs in a couple of years if the demand projections prove correct.
Orocobre Limited (OTCPK: OROCF)
The second stock that we like is an Australian based company Orocobre limited. The company holds 66.5% interest in the Olaroz lithium brine mine in Argentina, which is operated by them and is their flagship project.
They plan to ramp up production in the next 2-3 years, without issuing any new equity, according to the company’s latest presentation. If they are able to achieve their target, the stock is likely to get re-rated.
Currently, the stock is being punished as its production in June quarter was 2,536 tonnes of lithium carbonate compared to 2,784 tonnes in the March quarter. The company attributed the fall to bad weather. Nevertheless, the markets did not buy the argument and punished the stock.
This is a risky stock. We are not buying this for its past track record, but are expecting it to get its act together and reap the benefits of the lithium boom. Therefore, the allocation to this stock should be low.
When should one buy? Let’s look at the charts.
This is a volatile and trendless stock as seen in the charts. It is stuck in a range of $1 to $4.
Nevertheless, it has already fallen from its highs of $4, thereby reducing the risk. We can keep a stop below $1 and buy 25% of the allocation at the current levels. Next 50% can be bought if price falls to $2 levels. The last 25% should be invested once the stock breaks out of $4 and makes a new lifetime high.
We believe that the downside risk in the stock is limited, whereas its upward potential is attractive.
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