The past couple of months have seen the market reawaken to some of our battery related stocks. Major lithium miners who had stagnated for periods are again starting to see some price action, and small stocks with very uncertain futures are being pumped heavily in online forums. It seems that the whole space of companies related to battery technologies is super hot right now.

Any time a sector is this ‘hot’ it always pays to tread with caution. Sure, there are stocks like Novonix (ASX: NVX), which rallied from $0.50 to $2 in the space of roughly three months, but there are also stocks like Novonix, which plummeted from $2 to $1 in the space of four days.

So, what is a good strategy at a time like this? Sure, everyone wants to buy NVX at $0.50 and sell it at $2, but unlike what you may read on online forums, there are VERY few people who actually enter and exit at these levels.

Here are some simple things to look for when trying to determine if the ‘hot new thing’ will soar like a phoenix, or burn up like, well, a phoenix.

Size:

It is a lot harder for a stock worth $10 billion dollars to justify a $20 billion dollar valuation, than it is for a stock worth $10 million dollars to justify a $20 million dollar valuation. If you have heard about a stock that already has a market capitalisation of $1 billion or more, there better be an underlying business that is generating at least some revenues or holds extremely valuable assets, otherwise that capitalisation can quickly come tumbling down. This feeds into the next point.

Financials:

The financials of a business are the ultimate determiner of whether a stock will keep rising or not. As a quote with disputed attribution states “in the short-run the market is a voting machine, but in the long-run it is a weighing machine”. For a small high growth company this doesn’t necessarily mean that they are generating profits, but at least that there is a clear path towards making money. Or it maybe they are holding high value of assets. Regardless, the larger the size or capitalisation of the business, the stronger the underlying financials will need to be to justify further gains in size.

Spruiking:

If you are reading about a stock in an online forum, especially if the post is accompanied by plenty of 🚀 🚀 🚀s, consider why the post is being made. Is the poster benevolent? Hoping to share a great discovery with anonymous friends online? Or is the poster looking to sell their stock? Many of the posts you may read in online forums are there solely because the poster wants to get fresh buyers in so that they can push up the price and buy his stock. This poster is unlikely of the view that in 10 years’ time the stock will be a blue-chip stalwart, as if he were, he would not be making the post.

When viewing some of the battery related stocks through these lenses, current prices may look unattractive. Or in fact, you may find that there are diamonds out there. When a sector is running as hot as this one is at the moment though, it can pay to be cautious.

These are just some simple things to look for when speculating on a short-term investment. The reality of securities analysis is often a lot more complex. At Emerald Equities we try to simplify the process for investors by surmising information for every ASX listed stock with our quantitative scoring models.

We also provide stock recommendations on what we believe are the most attractive ASX listed opportunities. If you are interested in hearing more about this and the other features we offer, please don’t hesitate to contact us on 03 8080 5777 or click here.