We left off yesterday with the idea that the lithium sector might be bottoming out.

You sure wouldn’t jump to that conclusion going off the price signal.

Lithium is down 10% over the last 3 months, according to Wilson Asset Management.

However…

What do we see today?

There’s news that Rio Tinto ($RIO) is going to invest US$900 million into a 49.9% stake in a Chilean lithium miner.

This adds to the approximate US$7 billion Rio committed last year via the takeover of Arcadium Lithium.

Cue the cynics about how major miners are always doing poor acquisitions.

Maybe. Maybe not. To me, taking advantage of the distress in the lithium (and wider) mining juniors is what you want the big players to be doing.

Sure, there’s risks around M&A. There’s risk in doing nothing too.

For our purposes, it seems clear that Rio sees big potential in lithium.

I do too. Solar is growing exponentially around the world. And China’s electric car industry is growing fast. We also know a lot of supply has gone offline in the current bear market.

Let’s go old wise man for a moment.

All the old hands say you’re supposed to buy resources when they’re down in the dumps.

That’s the theory. It’s the timing that’s the bitch.

Case in point is coal.

Coal prices have been weak for a while. There appeared to be some value in the sector via some of the bigger producers. One of those is New Hope (NHC).

That said, the share price took a 7% whack on results yesterday. Lower coal prices hurt its profitability.

Don’t get me wrong.

New Hope is still profitable at today’s thermal coal price. It’s also has a big cash hoard to buy back stock in this cyclical weak patch.

It’s by no means a bad idea. But it’s going to need a strong lift in coal pricing for the market to really chase it.

I’m sure my colleague Greg Canavan would advise to accumulate it while it’s cheap, on the assumption that the pay off will be big when coal swings upwards.

The reality is most investors won’t have the patience, including me

That reminds me…

I was flicking through Joel Greenblatt’s classic book last night. It’s called The Little Book That Beats the Market.

He writes about his “magic formula”. You can read the book for the details on that.

Here’s the point…

Greenblatt’s backtesting showed the magic formula produced a great return over a 15 year period (note, the book is quite old now).

There’s a catch. There are years, sometimes consecutive, when the magic formula doesn’t work.

In other words, you have to trust in the formula and grind out the bad years.

You need to resist the urge to chase the market, or the hot sector at the time, while this underperformance is going on.

And the odds of that happening are SHITE.

Fund managers can rarely do it. Their clients will dump them long before a full cycle plays out. Most investors can’t stand it, either.

That’s why, Greenblatt argues, the magic formula works. If it paid off every year, paradoxically, it would be too obvious and easy.

Let’s be honest. You and I want to make a buck sooner rather than later. The magic formula is not going to be our strategy.

We need a timing tool. Is there one?

Actually, when it comes to resources, there is. It’s called the Lion Investment Clock. I’ve been using this since 2022 with great success.

It kept me out of the critical mineral wipeout from 2022 to now. It helped guide me back into the gold sector too.

Hedley Widdup, the chief investment officer of Lion, says the clock is now pointing at 5.

You can see that here…

See the implication?

We’re getting close to boom times. We’re already seeing the inkling of this via the big run in gold shares over the last 12 months.

Now we can expect some of the other resources to start rumbling in the next 12 months.

I suggest you start following the mining juniors. You can start here, if you like.

Best wishes,

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

*****

Murray’s Chart of the Day
– S&P 500 vs Small Caps and Transport

By Murray Dawes, Tuesday, 20 May 2025

The sharp rebound in stocks over the last month has many analysts scratching their heads wondering what comes next.

I am one of them..

The S&P 500 has raced back to its all-time high.

But if you dig beneath the surface you can see that buying remains strong in megacap stocks, but the smaller end of the market continues to struggle.

The small cap focused Russel 2000 Index has barely bounced since the lows hit in April.

The Dow Transport Index is usually a good proxy for strength in the underlying economy. You can see above that the bounce since the low last month in that index has been underwhelming.

I think the sharp bounce over the last month is probably short covering and the sellers will return within the next few weeks.

Regards,

Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps