Oh, ouch, that hurt…if you’re a uranium investor, anyway.

Did you see the news yesterday?

The flagship stock of the sector, Paladin [ASX:PDN], got slammed 25% down on Tuesday. That’s a brutal session for any shareholder.

You can probably guess why from the heat in the reaction. Paladin downgraded its production forecast for the year.

It also needs to shut down the mine for two weeks to iron out some of its operational glitches.

Not good, in other words.

This is always a risk you run holding a miner, especially when the mine is ramping up, as Paladin is doing.

However, there’s another risk embedded in a share price like this too…

What is that embedded risk? High expectations.

Uranium has been a hot sector over the last 18 months or so.

The narrative long ago flipped from being a dead duck industry to a potential ‘green’ solution to the impending energy crisis engulfing the world.

Paladin was the standout way to go along for the ride…until yesterday.

As is always the case, hell hath no fury like disappointed shareholders.

That’s the way it goes sometimes.

Riding the uranium bull meant embracing the risk of missed operational targets and having lofty expectations turn to disappointment.

This is why one of my favourite expressions in the stock market is this:

“I look down before I look up.”

That’s attributed to hedge fund legend Jim Rogers. His Quantum Fund, with George Soros, built one of the best records of all time.

What Jim means is that he’s more concerned with his downside risk before he starts projecting his potential profits.

That’s why Jim says he loved to buy companies and industries that have gone through the wringer…and almost on the verge of bankruptcy…back when he was an active money manager.

That’s because the price has borne the brunt of the bad news, minimising the downside risk!

This is part of what made 2023 so compelling. So many stocks were smashed…all you had to do was buy against the crowd.

But it’s nearly 2025 now…and the market is at all-time highs.

The good news is there’s still opportunity…

If you and I can find a sector still down in the doldrums, we know we have a shot at two things…

• Not getting smashed from high expectations not getting met
• Big upside if the industry can turn around

Is there any sector still clobbered and unloved?

Yes!

It’s the lithium sector. I’ve talked about this before recently.

Let me show you something…

On Monday, lithium miner Liontown Resources [ASX:LTR] came out with a market update.

What did they say?

They’re going to suspend their production expansion plans, plus slash spending to survive the current lithium winter.

Did LTR get smashed 25% like Paladin?

No – not at all.

That’s because the current terrible lithium price is well known. The market no doubt saw the news coming weeks ago.

Indeed, all the lithium stocks have priced in the cruddy environment.

Over at Pilbara Minerals [ASX:PLS], something similar just happened. They put one of their plants into care and maintenance to wait out the current period.

The stock has held steady at around $3 per share for several months.

This suggests, bar another leg down in the price for lithium spodumene or the upstream chemicals, that the lithium stocks are bottoming out.

Look at the wider industry…

We have lithium mines closing down…others curtailing production…and investment screeching to a halt.

These are all the classic signs of a commodity bear market.

Plus, all the previous price declines have crushed investor expectations to smithereens.

So…

We have a Jim Rogers style environment in play. We can look down and confidently conclude that the sector has priced in all the bad news.

That doesn’t mean it can’t get worse, of course…and it doesn’t mean buy, either.

There’s one more thing that Rogers’s above quote implies is that it’s not enough to be contrarian and buy something in distress.

You also need an “exciting cause” to catalyse the sector back into life.

Lithium doesn’t have that right now. It’s in a kind of limbo.

However, one base case is for lithium demand to rise 10x from 2020-2030.

What we’re seeing now could be a ‘cyclical’ downturn in a ‘structural’ bull market.

It happens all the time in markets — especially in commodities.

Can we be confident this is the case?

Well, we know Rio Tinto is prepared to pay billions to acquire Arcadium Lithium. Rio has the financial muscle and timeframe to go the long haul.

We also know Tesla stock is booming. It’s up 50% since the election.

We also know China’s industrial strategy is built on electric cars.

Should lithium prices not rise in the future, lithium won’t be available at any price.

For this reason, lithium must eventually recover…or there will be no Tesla’s or BYD cars in China.

There’s no urgency to rush in yet. Most lithium miners can’t make money at today’s prices.

There’s no point chasing the stocks until they can bank profits again.

Watch the lithium price first.

For now, we watch…and wait.

However, as soon as we see some catalyst for lithium to recover strongly, be prepared to go after the sector. I’m sure Jim would if he were still active today.

Best wishes,

Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator

PS. If you’re keen to hear about 3 ideas to consider now, go here to see my latest presentation on why 2025 could be a belter for these three stocks.

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