Bigger than lithium

  • ‘Prohibition’
  • Mischievous central bankers
  • Biggest event of the year
  • Record profits, and nobody cares (Part I)
  • Record profits, and nobody cares (Part II)
  • Financial Anarchists

One of the biggest market booms in recent years has been for lithium.

Why? It’s all down to the growth in electric car production and demand.

The boom has resulted in a number of tiny lithium stocks soaring by hundreds, sometimes thousands of percent.

Well, while the lithium boom may still have room to run, there’s another element that could be even more important than lithium, and which could equally result in a much bigger boom.

As Reuters reports:

Investors are buying up physical cobalt anticipating that shortages of the metal, a key component of lithium-ion batteries used in electric cars, will spur prices to their highest levels since the 2008 financial crisis.

Prices for cobalt metal have climbed nearly 50 percent since September to five-year peaks around $19 a lb as stricter emissions controls boost demand for electric vehicles, especially in China, struggling with ruinous pollution levels in some cities.

Consultants CRU Group say electric car and plug-in hybrid vehicle sales could hit 4.4 million in 2021 and more than six million by 2025, from 1.1 million last year.

By 2020, 75 percent of lithium-ion batteries will contain cobalt, whose properties allow electric cars to extend their range between charges, according to eCobalt Solutions, which produces battery grade cobalt salts.

There’s a boom in a niche part of the mining sector. It could be the biggest boom in years. Check it out. Go here.

Markets

Overnight, the Dow Jones Industrial Average closed up 107.45 points, or 0.52%.

The S&P 500 gained 11.67 points, or 0.5%.

In Europe, the Euro Stoxx 50 index closed up 14.82 points, for a 0.45% gain. Meanwhile, the FTSE 100 gained 0.47%, while Germany’s DAX index rose 0.19%.

In Asian markets, Japan’s Nikkei 225 index is down 123.48 points, or 0.64%. China’s CSI 300 is up 9.23%.

In Australia, the S&P/ASX 200 index is up 4.7 points, or 0.08%.

On the commodities market, West Texas Intermediate crude oil is US$53.03 per barrel. Brent crude is US$55.75 per barrel.

Gold is trading for US$1,233.51 (AU$1,596.84) per troy ounce. Silver is US$17.97 (AU$23.27) per troy ounce.

The Aussie dollar is worth 77.24 US cents.

‘Prohibition’

Shocking news from the City of London. The Financial Times reports:

One of the last bastions of face-to-face trading in the City of London has raised the hackles of its staff by banning alcohol during working hours.

Lloyd’s of London, the insurance market, has issued new guidance to its 800 employees that includes a 9­–5 prohibition on drinking alcohol. The ban only applies to Lloyd’s staff, rather than the insurance brokers and underwriters who do business in the 329-year-old market.

Two points. First, from what we know of the City of London, a 9–5 prohibition won’t make much of a difference. Pre-9am drinks are still allowed!

Second, if Lloyd’s of London did try to ban drinking by brokers and underwriters, half the pubs around the Fenchurch Street and Leadenhall area of the City would go out of business immediately.

We know, having worked for several months 20-plus years ago in the East India Arms pub on Fenchurch Street. The brokers and underwriters would stroll in just after the doors opened, arms laden with manila and leather folders, find a spot, and remain there for the next four hours.

A pint of porter (or two), a ‘winter warmer’, or Glenmorangie — straight up, no ice — would precede their wholesome lunch of a thick pork sausage with hot English mustard. More drinks would follow.

Those were the days.

And it’s probably also why London’s insurance market share continues to fall.

Mischievous central bankers

Staying in London, it seems central bankers are developing a sense of mischief, or perhaps irony.

As The Mirror headlined recently:

The old “round pound” — introduced more than 30 years ago — will cease to be legal tender as the new £1 is dubbed the most secure in the world.

Ah, the trend of demonetisation continues. Most recently is was India, with its decision to withdraw two denominations of existing banknotes, in order to replace them with a new banknote. The reason? That crooks, drug dealers, money launderers, and tax evaders were the main users of the notes.

By withdrawing them from circulation, it would deal a deathblow to the criminal element. Except it didn’t. Instead, it harmed India’s poorest and most vulnerable people — the poor and underclass who likely wouldn’t even know about the changes. Or, if they did know about the changes, they may not have a clue about how to deal with it.

But following India’s demonetisation, the UK is following suit by withdrawing the existing set of pound coins, and replacing them with a new design, with a new shape, and supposedly with great new security features to eliminate counterfeiting.

We won’t get into the argument about central bank’s being the world’s biggest counterfeiters — OK, we just did. But we will return to the point of the Bank of England’s cruel sense of irony. As The Mirror also reports:

The new £1 coin is based on the design of the old 12-sided threepenny bit, which went out of circulation in 1971.

Interestingly, using the Bank of England’s inflation calculator, one pound today, has the same purchasing power as eight pence in 1971. That’s not a million miles away from the 1971 threepenny bit.

It just goes to show that when it comes to destroying the value of money, the central banks are much more effective at it than the so-called criminal element.

Biggest event of the year

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You really should not miss this announcement. Details will be in your inbox on Saturday. Look out for it.

Record profits, and nobody cares (Part I)

It continues to be a tough year for Domino’s Pizza Enterprises Ltd [ASX:DMP].

It’s getting into strife for underpaying or not paying staff. And yesterday, the stock price fell nearly 15%.

Oh dear.

That will likely irk investors.

Yesterday, the company reported revenue of $539.4 million.

That was compared to $445.3 million for the previous corresponding period.

It reported a net profit of $50 million.

That was compared to $43.3 million for the previous corresponding period.

Yet, the stock price fell nearly 15%. It’s down 33.1% since the price peak last August.



chart image

Source: Bloomberg
Click to enlarge


The wages stuff isn’t helping.

But we may hazard a guess that the main reason for the price slump is the valuation. Even now, after the price drop, the stock is trading on a trailing price to earnings (PE) ratio of 53-times.

In our view, that’s expensive. Look at competing fast food franchise operator, Collins Foods Ltd [ASX:CKF]. Collins Foods owns and operates Kentucky Fried Chicken (KFC) franchises.

Like Domino’s, Collins Foods has recorded strong revenue growth over the past four years. It has grown revenue too. Last year, Collins Foods recorded a net profit of $29.2 million.

Yet, Collins Foods trades on a trailing PE ratio of 18-times earnings.

We agree that you can’t expect all stocks to trade on the same earnings multiple, even those in the same or similar industry. But the difference between 53-times and 18-times is a big gap…and we don’t see it as justified.

Of course, the hot money has gone into Domino’s over the years. The stock is up 2,413% since 2005. That’s a good return by anyone’s standards. But we’d argue that sentiment has changed. Investors were happy to pay a high valuation as long as the stock was on a seemingly unending run of gains.

But as we mentioned, the stock price is down 33% since the middle of last year. Will potential investors, looking for somewhere to stick their cash, view Domino’s as a good buy when it’s trading at 53-times earnings?

Some may. But we still find it hard to imagine an almighty rush to buy it. Not when there are alternative high-growth stocks on the market. Stocks that are still at the beginning of their growth spurt, rather than nearing the mature stage.

We’ll keep an eye on it. We wrote some months ago that Domino’s appeared to be a good short-selling proposition. Even after the 33% drop, we don’t see any reason to change our view.

Record profits, and nobody cares (Part II)

From Bloomberg:

South32 Ltd., the world’s largest supplier of manganese, reported first-half profits after raising output to benefit from surging markets.

Underlying profit rose to $479 million in the six months ended Dec. 31, from $26 million a year earlier, the Perth-based diversified mining company said in a statement Thursday. That beat the $352 million median forecast among four analysts’ estimates compiled by Bloomberg.

The impact on the South32 Ltd [ASX:S32] share price? As we write, the stock is down six cents, to $2.61. The stock price is up 116% over the past year. So you could argue the positive news was already baked into the stock price.

The flipside of that argument is that the stock has barely gone anywhere over the past three months.

It just goes to show you, even though commodity prices may be rising, it doesn’t mean all resources stocks have gone up. Investors can’t back any old stock. You still need some assistance. And you need assistance from analysts who know how to spot key trends, and can get into them fast.

Looking for the next big resources trend? One analyst says he’s found it. Details here.

Financial Anarchists

Remember to check out the latest episode of the Financial Anarchists podcasts. The next episode will be out on Saturday. Standing in for regular host James Woodburn will be the show’s producer, Dan Ryan.

Dan will interview Crisis & Opportunity editor, and Port Phillip Publishing’s Head of Research, Greg Canavan. He’ll question him on what Greg calls Australia’s natural gas ‘Crunch Point’.

Topping and tailing the show, Dan and your editor discuss the interview, plus we touch on a number of our favourite topics: climate change and house prices…and some other stuff. To check it out, search for ‘Financial Anarchists’ on iTunes or Stitcher.

Subscribe to the channel, check out the archive of previous episodes, and then wait for the next episode to download to your podcast player automatically each Saturday morning.

Cheers,
Kris