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The Best Long-Term Buy In Lithium


As a rule, I don’t like well-publicized, obvious trades, and for one good reason. By the time you get to them, the value has already gone, and the all-important risk/reward ratio is usually skewed against you. The last thing any trader wants to be is the last one in on a move. Occasionally, though, there is an opportunity with a well-known, clear rationale that still makes sense. The mining company Albermarle (ALB) is a case in point.

(Click to enlarge)

The reason that buying ALB is obvious is what ties it in with energy, they are the world’s largest producer of lithium, with around thirty-five percent of total global production. In case you hadn’t heard, lithium ion batteries are what power electric vehicles (EVs) and, surprise, surprise, they need lithium, so miners of the mineral are obviously in a good place to benefit from the shift towards EVs.

One would think that with a bull case as obvious as that, ALB would be trading at ridiculously high P/Es, an assumption supported by the chart above that shows around a fifty percent increase in the stock this year. One would, however, be wrong in that assumption. The stock has a trailing P/E of 16.7, below the Dow’s average of around 21, and a forward multiple of 25, which is above the Dow’s 19.93, but hardly overdone in the circumstances, and those circumstances are pretty persuasive.

In a very short period of time, EVs have gone from a niche market for small vehicle producers like Tesla (TSLA) to a mainstream idea that is being embraced by every major manufacturer. Volvo was the first to announce that they would go all electric, but even the usually sleepy and conservative GM (GM) have committed to a battery powered future. It is estimated that each Tesla battery pack contains around 63 Kg, or close to 140 Lbs. of lithium and GM makes close to ten million vehicles each year, so the potential demand for lithium is staggering.

There is no pure lithium play right now, but ALB, as the largest producer and with around forty percent of revenues currently coming from lithium, is about as close as you can get. That is enough to make the stock a long-term buy, but there are short-term factors other than lithium that can provide some insurance, and make buying ALB now look smart. The rest of their revenue comes from mining more conventional commodities, and as Nick Cunningham pointed out in his article at Oilprice.com yesterday, Goldman Sachs has joined the growing band of experts predicting higher commodity prices all around next year.

(Click to enlarge)

As if that wasn’t enough, the recent price action sets ALB up for the kind of risk-controlled trade that I look for, even when initiating what is intended to be a long-term position. The recent retracement of the stock adds to the value of the play now, but it also provides a logical level off which to set a stop loss. The retracement hit a low of 126.31 on December 6th around a level that had provided support in the past and has done so again since. That triple bottom should be significant, so buying at around 131 with a stop set to reflect a clean break of that level, say at around 123 is logical. That would leave you with a potential loss on the trade of around six percent of your investment, which is a small price to pay given the upside.

Of course, there is always a chance that things will go wrong. A sudden shock to U.S. and global growth, a move towards another, as yet undeveloped type of battery or power unit, or a whole host of things could get in the way. As things stand, though, lithium demand is set to increase massively, and Albermarle is placed to benefit.

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