There’s no doubt electric cars and batteries are the way of the future, but has the investor fervour gone too far?
Going backwards from the finished product, ASX shares of miners that dig up lithium and other minerals that contribute towards batteries have been all the rage in recent months.
In fact, lucky Allkem shareholders have enjoyed returns of 78% over the past 12 months, and a remarkable 279% over the past 5 years.
Just on Thursday this week, ASX shares of lithium producers surged.
However, one expert has warned investors to be careful not to get burnt flying so close to the sun.
‘Material chance of disappointing’
In a memo to clients, QVG Capital analysts said that battery minerals have really become an area of “market speculation”.
But ultimate winners will be few and far between.
“There is no shortage of these names on the ASX, however, few are likely to have commercial operations,” the memo read.
“Unproven mining methods, chemical processes and or spicy jurisdictions that have never produced lithium before all loom as potential headwinds for these projects.”
The team warned that much “optimism” has been published about exploratory projects that “have a material chance of disappointing”.
“Selectively and within risk tolerances, we have taken a short position in some of these names which worked in April.”
And even if all those exploratory projects worked out, that would provide an oversupply and bring mineral prices down.
That’s typical of the materials sector, which is notoriously cyclical.
Investing for the long run
The team at QVG, much like at The Motley Fool, try to find investments that will perform in the long run — that is, over the entire economic cycle.
“Over a long enough time horizon, we are likely to experience the full spectrum of economic environments,” the memo read.
“Similarly, over a long enough time horizon, highly durable growth companies will be worth multiples of the low return, cyclically-driven companies we seek to avoid.”
The QVG long-short fund’s current 5 biggest holdings reflects this philosophy: