Typically, investors faced with fear and uncertainty have turned to the proven stability and reliability of gold. Certainly, the devastation resulting from the Covid-19 pandemic turned the world upside down, making the precious metals an excellent contrarian opportunity. Nevertheless, investors may also want to turn their attention to precious gemstones and their tremendous upside potential based on current economic conditions.
Principally, diamonds benefit from holistic necessity. Whether used as jewelry, investment or even industrial purposes, demand for diamonds relatively stays consistent no matter what is going on in the economy. For instance, people get engaged and married every year across the globe, irrespective of broader market conditions. Therefore, buying shares of premium gemstone producers like Lucapa Diamond Company (ASX:LOM) could spark significant gains for your portfolio.
Indeed, astute investors recognize that in this upcoming economic cycle, diamonds may be among the top-performing commodities. According to a press release from Bain & Company, the diamond market demonstrated resilience in the unprecedented disruption of 2020. Mainly, gemstone retailers, forced to close their brick-and-mortar shops, pivoted online. In turn, consumers who had limited avenues to spend their discretionary income embraced diamond jewelry instead.
As Bain reported, diamond sales rebounded in the fourth quarter of 2020, boosting the price of the underlying precious commodity. Not only that, holiday sales were strong across international markets, confirming the concept of pent-up demand. Simply put, people everywhere are tired of being cooped up at home and are ready to return to their normal lives.
This shift toward normalization has incredibly positive implications for diamonds broadly and Lucapa specifically. Think of all that we lost or delayed last year: proms, graduations, engagements, marriages, honeymoons – you name it. From the mundane to the milestone moments, the global community has been forced to scale back. But with Covid-19 cases retreating in many parts of the world, consumers want a piece of normalcy – and are more than willing to pay for it.
According to Olya Linde, a partner in Bain & Company’s Energy and Natural Resources practice, “Our research found that more than 75 percent of consumers intend to spend the same amount or more on diamond jewellery [sic] than before the crisis, indicating a strong, ongoing emotional connection with the diamond story.”
This emotional connection has also played out for Lucapa. As a specialist in high-value diamond production, Lucapa’s equity shares jumped 60% between the end of November 2020 to early February 2021. The primary catalyst was encouraging diamond demand, especially in the lucrative U.S. and China markets.
True, LOM stock has come down a bit from its February peak. However, this could be chalked up to market inefficiencies as the diamond sector doesn’t have the volume of other competing blue-chip sectors. Even so, this may be a prime opportunity for forward-thinking investors as the Diamond Prices Index has been steadily rising since July 2020.
Finally, it’s worth noting that many investors today are seeking the next big thing. With diamond sales rising, combined with Lucapa’s undervalued status relative to its revenue growth and proven production capacity, LOM stock has the potential to rebound off what has been an otherwise bleak period for humanity.
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