The Two Bright Spots in a Troubled Market

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Here’s some comfort when it comes to the markets.

Should the market fall further from here, there’s plenty of money on the sidelines that can come in to buy up cheap stocks.

Bank of America Merrill Lynch says cash levels among world’s fund managers are at their highest level since 2001.

15 years ago the world was grappling with the ‘tech wreck’ after the Nasdaq bubble burst and then 9/11.

These days it’s concerns over China and slow economic growth.

The Sydney Morning Herald also reports, ‘The report’s findings also confirm anecdotal evidence in Australia of fund managers raising their allocations to cash this year amid wild swings in equity markets.’

Fund managers want to see earnings growth. The good news is there’s some of it out there, if you’re following the company results.

One Aussie company winning at the moment

Take Burson Group [ASX: BAP] for example. Burson’s main business is auto parts, accessories and servicing. They distribute to both the retail and trade sectors. Their biggest brand is the Autobarn store network.

According to the Australian Financial Review, the company supplies 500,000 different car parts to mechanics and other chains.

The company released its half-year results to the market yesterday. Things look very good if you happen to be a shareholder. Net profit was up 77.9% and the interim dividend up 25%.

The company raised its full year profit outlook about 4% based off the first half results and strong trading in January. I take that as a positive for Australia’s economy.

The car sector in general is very interesting to watch right now. Both the UK and US are seeing record car sales.

Then there’s the development Tesla is driving in the electric car space. This is causing one sector of the resource market to go haywire: lithium.

Some huge returns in this sector

With thanks to my colleague Jody Chudley from Outstanding Investments, here’s why:

  • The battery of a normal cellphone uses approximately 5–7 grams of lithium carbonate
  • Meanwhile, a battery-powered (70kWh) electric car from Tesla (Model S) uses 63 kilograms of lithium carbonate.

According to Goldman Sachs estimates, just a 1% increase in the penetration rate of electric cars would cause total global lithium demand to increase by 50%.

If you haven’t heard, lithium is one of the few resources that has actually avoided the general commodity bloodbath over the last few years.

In fact, its’ been skyrocketing. See for yourself…

Source: Citigroup, Outstanding Investments

You can play this trend in Australia on the ASX.

This is why Bloomberg reported last week:

The only things hotter than Western Australia’s scorched Outback are the mining companies preparing to supply the lithium needed by the likes of Nissan Motor Co. and Tesla Motors Inc. to meet booming demand for electric cars.

Bloomberg cites the fact that two of Australia’s five best-performing stocks in the past 18 months are developing lithium material operations.

One of those is bound to be General Mining [ASX:GMM] which is up over 1000% since February 2015.

This is not news to the market

Of course, the positive tailwinds behind lithium are not news to the market. That’s why the stocks in this sector have been running.

Most of them have made their initial run. But there’s still potential for them to move higher from here.

The lithium stocks that do trade on the ASX are small and mostly speculative. The majority of them are still exploring and raising funds to move from identifying the resource they have to feasibility studies or actual production.

They will need to. The trend behind electric cars is not going anywhere. Car manufacturers need a guaranteed and secure supply. The capital investment these companies are making in plants and equipment is just too big to leave anything to chance.

Just consider Tesla. The company is building a new US$5 billion factory in the Nevada desert.

Not a regular factory though. Tesla chief and billionaire Elon Musk calls it his ‘Gigafactory’.

What they plan to do there is on a scale the world has never seen before.

By 2017, they will produce more lithium batteries in this one factory alone than the entire rest of the world combined.

Not only that, Elon Musk says there is a need for hundreds more lithium battery Gigafactories.

Tesla’s next quarterly earnings update is due after the US market closes on February 20.

It will be notable how lithium stocks react to that. Sales of Tesla cars are important to this trend.

The stocks in the lithium sector could be one of the most interesting sectors to watch in 2016 as individual projects develop.

My colleague Terence Duffy and I produced a report on this sector called Electric Gold. We profiled seven of the lithium stocks listed on the ASX.

We’ve made it available to subscribers of Cycles, Trends and Forecasts. If you’d like to know more, go here.

Best wishes,

Callum Newman

Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.
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