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Martin Tillier

Martin Tillier

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A Recent, Weak IPO That Creates An Opportunity For Investors

Traders and investors know better than most that timing is everything. What defines the success or failure of a trade is usually not necessarily where you buy or sell, but when. That is also true in another area of finance, initial public offerings (IPOs). The problem that companies face is that it takes a long time to arrange an offering, so market conditions can be very different once the shares are offered from what was assumed at the time the decision to go public was made. Sometimes though, unfortunate timing of an IPO can result in a major opportunity for investors, and there is one such case right now with stock in Livent (LTHM).

Livent is not a typical IPO in several ways. First it was a spinoff of the Lithium business of FMC Corp. (FMC), rather than a startup. Secondly, and much more importantly, the unit was already profitable when it offered shares to the public. In an IPO market dominated by crazy valuations of companies that have never made a penny (The reported $120 billion valuation being considered for Uber, for example) that is a rare thing.

Maybe the unusual nature of the offering confused traders, but for whatever reason the IPO was far from a resounding success. FMC had, along with joint bookrunners BofA, Goldman and Credit Suisse, anticipated a price in the $18-20 range but the initial $17 offering fell short of that. Even that, though, was not cheap enough for the market when the shares debuted on the 11th of this month. The first trade was at $16.25 and the stock hit a low of $15.91 a couple of days later. It has recovered a bit since, but is still below its offering price.

(Click to enlarge)

That is not particularly encouraging, but as I said above, may be more about timing than anything else. You can certainly make a case that, if viewed simply as a mining company, Livent was overvalued, but that ignores one very important thing…scarcity value. LTHM is not just another mining stock, it is the only pure play lithium stock available.

That brings us back to the timing issue. When plans were hatched to spin off FMC’s lithium unit, investing in the metal sometimes called “white gold” was all the rage. Investors were snapping up stocks with even a tangential relationship to lithium as it became clear that electric vehicles were here to stay and were probably the future of the automotive industry.

By the time the stock came to market this month, however, conventional wisdom had changed. Lithium batteries are still acknowledged to be a growth business, but the hype resulted in a boom in production that pushed prices down around twenty five percent from early year highs. Related: UAE Boosts Production, Introduces New Crude Blend

(Click to enlarge)

Readers here are I’m sure all too aware that commodity markets tend to be cyclical, and that is especially true when price fluctuations are caused by supply issues that are themselves price-driven. Falling prices take out marginal production and a glut can quickly become a shortage. It is reasonable on that basis to expect a recovery in Lithium before too long and when that happens, LTHM will recover with it.

That is not the only timing factor that has hurt LTHM though. The launch was the day after one of the biggest drops in the stock market for a long time. Obviously, that hurt the price, and the subsequent volatility has hardly been conducive to buying a “risky” recent debutante to the stock market. However, there is not much about LTHM that is risky. They are an established, profitable operation and a market leader in a business with significant barriers to entry that has enormous potential for decades to come.

That is not to say that buying LTHM is without some risk. If the market volatility continues and/or lithium falls further before bouncing, the stock could easily fall from here. For investors with some staying power and an appetite for risk though, it looks like the kind of stock that you will look at a few years from now and think “Why was it ever down there?”

By Martin Tillier for Oilprice.com

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