LTHM - Livent And Albemarle: 2 Lithium Stocks To Buy Now

2023-11-08 15:47:43 ET

Summary

• Lithium prices dropped off a cliff as oversupply and weak demand collided.
• However, overproduction and the economic slowdown are transitory factors, and lithium demand should push prices higher again soon.
• Several top lithium-oriented companies got stomped on during the lithium decline and offer significant long-term buying opportunities.
• Due to stellar demand, lithium prices should stabilize and recover, leading to much higher stock prices for several high-quality global market-leading lithium innovators.

I don't need to tell you that the world around us runs on lithium. Lithium-ion batteries are used in everything from cell phones to laptops to electric vehicles "EVs," energy storage devices, and much more. While there is no " official lithium price ," prices for the unique compound have dropped sharply (roughly 75%) since their peak last year.

Lithium Carbonate Price

Overproduction by lithium miners, slower EV sales, and other transitory factors have cast a dark shadow of uncertainty over the lithium market. However, despite the short-term troubles, the long-term image remains bright.

Global Lithium Demand

Despite the transitory slowdown, lithium demand is stellar and should continue growing exponentially in future years. Lithium demand is expected to approximately quadruple in the 2020-2025 time frame. Moreover, robust demand should continue, equating to a ninefold increase in 2020-2030. Additionally, the battery-grade lithium associated with EVs could increase around twentyfold during this hypergrowth period.

The recent disruption to lithium prices occurred due to a temporary oversupply and a transitory slowdown in demand, primarily in the EV market due to slowing macroeconomic factors. Nonetheless, this dynamic should stabilize and reverse as the lithium market corrects itself. Lithium demand should recover, leading to substantially higher lithium prices in future years.

Top Lithium Stocks Have Been Stomped On

High-quality lithium stocks got stomped on during this transitory lithium price downturn phase. For instance, Albemarle ( ALB ) and Livent ( LTHM ) are the two companies I prefer to own in this space. Albemarle is the top ( most significant ) lithium miner globally, and Livent is a top global innovator in the lithium compound space.

ALB: 1-Year Chart

ALB is down by 65% from its high and is drastically oversold here. The RSI has dropped below 30 several times, and ALB is deeply below its 200-day MA. Moreover, we saw substantial sell volume during the most recent price collapse, indicative of panic selling, capitulation, and a possible bottom. The technical image is improving, and ALB could form a sustainable base around $100-$120 and start moving higher.

LTHM: 1-Year Chart

LTHM dropped by more than 60% since its high around a year ago. We see similar dramatically oversold technical conditions. We also see panic-like, capitulation-style panic, screaming that the bottom is likely near. Despite the stock taking a substantial down-leg during the most recent selloff wave, the RSI failed to go below 30. This dynamic suggests that the technical momentum could improve, and the stock may soon reverse. Additionally, we see improving full stochastic and CCI readings, meaning the bottom could be close (or in already).

Two Sound Companies Trading at Deep Discounts

Both stocks have traded like they are going out of business, but that could not be further from the truth. Albemarle and Livent are financially stable and highly profitable, have declined to meager levels, should be close to bottoming, and have significant upside potential ahead.

Albemarle - Despite a minor revenue slowdown, Albemarle's earnings continue to improve. The company has reported a TTM net income of about $3.32B relative to the $2.69B it made in 2022. Moreover, Albemarle has a healthy $1.6B cash position and approximately $3.38B in long-term debt.

Albemarle is Finally Cheap

Due to the uncertainty regarding near-term lithium prices, Albemarle's EPS estimates are all over the place. Nonetheless, despite the decline, Albemarle could earn around $15 in EPS next year and approximately $20 in EPS in 2025 as lithium prices stabilize and proceed to move higher to keep up with the insatiable demand. Therefore, Albemarle is trading around eight times forward EPS estimates, which is cheap. Moreover, looking further, Albemarle gets even more inexpensive, trading at approximately six times 2025's potential EPS.

Livent is Dirt Cheap

Despite the lithium price fluctuation and other transitory factors, Livent remains highly profitable. Livent reported a TTM net income of $375M relative to its $273.5M net income for 2022. Livent has a healthy $112M cash position and about $243M in long-term debt.

Livent could make around $2 in EPS in 2024 and approximately $3 when the lithium market normalizes in 2025. Therefore, Livent is trading at about seven times 2024 EPS estimates and below five times going out to 2025 EPS estimates. Moreover, we could see robust growth after that, and revenue should continue advancing in the coming years. Even if we see continued earnings weakness, it seems more than priced in to the share price here.

When The Analysts Panic, You Know The Bottom is Near

It's remarkable to see so many downgrades materialize, especially at the last minute. The $64,000 question is, what's the point of downgrading Albemarle after a 65% decline? Why didn't we see more downgrades at $200-$300? The "last minute" downgrades indicate that the bottom is near.

UBS recently downgraded ALB from a buy to a neutral with a price target of $140 for the stock. Do you see the absurdity here? UBS had a buy rating when ALB was at $300 and a high price target as the stock crashed 65%. Now that it's $120, they downgrade it. What?

Not to be outdone, Morgan Stanley's analyst slapped a street-low $90 price target on ALB (from $155). Piper Sandler's analyst lowered his price target by a whopping $100 ( from $255 to $155 ). He also lowered Livent's outlook from $33 to just $19.

A primary concern here is that we see significant downgrades around the lows. This dynamic suggests the market may be overly focused on transitory factors, such as a temporary supply surplus and slower demand in the coming months.

On the other hand, RBC's Arun Viswanathan cut his PT for Albemarle to $163 from $212 but kept his outperform rating. Despite the lower lithium price slump, he cited the company's long-term growth outlook, low inventory levels, and financial strength as positive elements to consider in the intermediate and long term.

The Bottom Line - Top Two Lithium Strong Buys

While we could see lithium-related earnings continue declining in the coming quarters, this is normal given the market dynamics. Still, earnings should stabilize, rebound, recover, and move higher as the lithium market balances out in future years.

There's a reason I did not buy Albemarle at $330 or $300, and I did not purchase it at $200-$250. However, at $100-$120, Albemarle looks extremely oversold and highly undervalued, so I recently increased my stake. Livent also faces temporary headwinds as its shares get pressed down during this uncertain phase. Yet, clarity should return to the lithium market, and a primary factor to consider is the insatiable demand.

The global economy should continue pivoting toward an EV future of other products and gadgets fueled by the endless lithium-ion battery stream. The temporary oversupply and the transitory economic slowdown have caused lithium prices to crash.

However, this is the time to go long, high-quality lithium-related stocks, and my top two picks are Albemarle and Livent. These two lithium powerhouses could return to profit growth soon, and their share prices may go much higher from here.

• One-year price target range for ALB: $175-$200
• One-year price target range for LTHM: $18-$20

Also, the underlying stocks provide significant option potential, including with the wheel strategy and the CCD plan. Therefore, we can earn extra yield by implementing an option strategy with these two stocks.

For now, the most optimal stray may be a wheel option trade where we sell cash-secured puts - Sell the 12/15/23 $115 puts for about $4.80, earning a 4% yield . We can also sell the $120 puts for about $6.75, (about a 6% premium).

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