A world-class lithium producer just went on sale … what’s behind the selloff … have investors become too bearish? … the lowest valuation in years … a gutter RSI level

A world-class company just went on sale, and it’s offering investors both a short-term bullish trading opportunity, as well as a longer-term growth story.

We’re talking about North Carolina-based lithium producer, Albemarle (ALB).

Here’s a quick snapshot of the opportunity…

Lithium is a key metal necessary for electric vehicle batteries, the transition to clean energy, and next-generation tech products. As such, demand for it is going to skyrocket in the coming decades.

I write that with zero exaggeration. Here’s a White House Fact Sheet from last year:

As the world transitions to a clean energy economy, global demand for…lithium and graphite used in electric vehicle (EV) batteries…will increase by…as much as 4,000 percent.

Despite this tailwind, lithium carbonate prices have dropped 50% this year.

Here’s The New York Times to explain:

Some analysts said the falling price of lithium was caused by short-term factors like slowing sales growth in Europe and China after subsidies for electric car purchases expired.

But other industry experts said the drop suggested that new mines and processing plants were solving the lithium problem sooner than many analysts had thought was possible.

Weakness in lithium prices has weighed on the sector’s top miners/producers – one of which is Albemarle. The stock has fallen from more than $320 last November to $173 as of last Friday’s close.

The losses accelerated Friday after Chile’s President Gabriel Boric announced his plans to nationalize the country’s lithium industry. Chile is the world’s second-largest producer of lithium behind China.

Albemarle’s stock fell 10% even though management said the news will have “no material impact on our business.”

If anything, ALB should have climbed as it’s one of a few U.S.-based lithium companies – and as The New York Times reminds us, “the Biden administration…has allocated billions of dollars to encourage companies to develop lithium mines and refineries in the United States or in countries with which it shares close political and economic ties.”

In any case, the combination of lower lithium prices all year, combined with this kneejerk selling pressure on Friday has resulted in massively oversold conditions in Albemarle’s stock.

(Albemarle is rebounding as I write on Monday. We’ll get to that.)

Put it all together, and we have the potential for a mean-reversion rally from ALB in the short-term, combined with a powerful growth story in the long-term.

Let’s jump into the details.

The long-term term case for lithium

As we noted earlier, lithium is critically important for electric vehicles batteries, the clean energy transition, and next-generation tech products. Given this, demand is going to explode over the coming decades.

Here’s The New York Times:

The supply of lithium has to increase 42-fold by 2050 to support a transition to clean energy, said Jose W. Fernandez, the undersecretary for economic growth, energy and the environment at the State Department.

“We have to find additional sources of supply because 42 times is a lot,” Mr. Fernandez said in an interview. “Right now, we don’t have enough.”

In Friday’s Platinum Growth Club update, legendary investor Louis Navellier provided more details.

He began by pointing toward the EPA’s “war on vehicles with internal combustion engines” which has resulted in a proposal for new emission regulations that would require as much as 67% of new vehicles sold to be fully electric by 2032. 

After breaking down the proposal further, Louis pointed toward a recent New Yorks Times article that questions whether it’s even possible for automakers to comply with these new EPA rules.

Here’s Louis with more:

The problem with the strict mandate is the lack of resources necessary to build EVs. 

The New York Times article pointed out that the world only makes 10% of the lithium that the EPA would require under these new emission rules.

And let’s not forget Tesla CEO Elon Musk’s imploring for more lithium refining from last week. From Yahoo! Finance:

[Musk] reminder investors of a growing challenge in the U.S. when it comes to the electric vehicle industry – securing refined lithium for EV batter.

“The choke point is much more on refining capacity than it is on mining…” Musk said on Tesla’s earnings call…

Musk went on to beg entrepreneurs “instead of making a picture sharing app, please refine lithium.”

Albemarle is already doing that, but we’ll return to the company in a moment. For now, let’s continue with the broader lithium opportunity.

The bull thesis for lithium doesn’t just rely purely on a lack of supply to meet this greater demand

There’s a national security dynamic at play because one country controls nearly all the world’s lithium production…

Back to The New York Times:

Most lithium refineries are in China…

Beijing’s near-monopoly on an essential resource alarmed the Biden administration, which has allocated billions of dollars to encourage companies to develop lithium mines and refineries in the United States or in countries with which it shares close political and economic ties.

Supplies of lithium and other critical materials are a national security issue, Mr. Fernandez said. 

So, how bad is the problem?

To help us answer that, let’s turn to our macro expert Eric Fry, editor of Investment Report.

Regular Digest readers know that Eric is a huge battery metals bull. Much of our own bullishness here in the Digest has come from a review of Eric’s research.

Here he is detailing China’s chokehold on lithium, as well as other battery metals:

As a supplier the global EV industry, China provides…

– 60% of the lithium chemicals…
– 79% of all lithium-ion batteries…
– 80% of the graphite material for battery anodes…
– 70% of the refined cobalt…
– 55% of the primary nickel…
– And 85% of the processed rare-earth elements.

The picture that emerges from these percentages is impossible to miss; China dominates most of the links in the worldwide EV production supply chain.

That’s not an ideal structure for U.S.-based EV manufacturing.

If China decided to weaponize its lithium exports, it would have a crippling domino effect through the U.S. economy.

That alone is bad enough, but with last week’s news about Chile nationalizing its lithium industry, it raises questions about this trend toward government-based metals hoarding.

Here’s Seeking Alpha:

State involvement in the key EV resources could make inking contracts and their conditions more difficult, or even lead to a kind of battery metal cartel.

On the flip side, it may trigger a chain reaction of countries looking to safeguard their natural resources with the hope of boosting their economic growth or raising incomes.

Mexico already nationalized its lithium deposits last year and Indonesia banned exports of nickel ore in 2020.

Clearly, this is a huge, long-term tailwind for Albemarle, which is the biggest lithium producer in the U.S.

As to the shorter-term trading opportunity, we can thank months of price weakness, punctuated by last Friday’s Chile-based selloff

Albemarle’s stock dropped 10% Friday, and has lost 46% since mid-November of last year.

This has created extraordinarily “oversold” conditions in Albemarle’s Relative Strength Index (RSI).

You might recognize the reference to RSI as we used it to analyze our ITB trade last week. In short, RSI is a momentum indicator that measures the extent to which an asset is overbought or oversold.

A reading over 70 suggests an asset is “overbought” (which increases the odds of a mean-reversion pull-back) while a reading below 30 means it’s “oversold” (which increases the odds of mean-reversion gains).

Traders often reference a stock’s RSI as a way to help time entries and exits.

As you can see below, as of Friday, ALB’s RSI had plummeted all the way to 23. This isn’t just in the basement, it’s five levels underground in the nuclear fallout bunker.

While this oversold RSI doesn’t mean that ALB has to surge immediately, it appears that’s what’s happening

As I write Monday morning, ALB is up 5%, and its RSI level has jumped from 23 to 32.

Should we expect more gains?

Below, we look at ALB over the past 18 months, highlighting how its market price reacted after its RSI level reached oversold (and in some cases, only near-oversold) conditions.

Clearly some of the oversold RSI levels resulted in major bull runs and others did not. Instead, they produced shallow and short-lived bullish spikes before bearish momentum took back over.

That could happen again today – and that’s why you must be comfortable with the risk level of this trade. Medium-term momentum is clearly bearish today.

If you don’t want to jump in immediately, you can wait and watch the price action itself. You’d be waiting to see a succession of “higher-highs and higher-lows.”

Of course, if you do that, you might miss a major spike, which is how ALB has reacted to such depressed RSI levels before, and which is happening as I write today.

In any case, this trade has risks. So, if you take it, you’ll want to remember the longer-term investment thesis too.

On that note, let’s add one more detail…

All else equal, the less you pay for a dollar of a company’s earnings, the better. We’re referencing a company’s price-to-earnings (PE) ratio.

ALB’s average PE ratio over the last five years was nearly 48.

Now, we have to take that with a grain of salt. Early last year, its PE exploded to more than 200 as investors stampeded into all-things-EV.

If we go back to 2019 to get a more balanced perspective on ALB’s “non-mania” PE ratio, we see a range of roughly 10 – 14.

So, what’s ALB’s PE ratio today?

7.7.

That’s the lowest in the last five years.

Now, a bear can argue that this low PE represents investors’ lackluster view of Albemarle’s business operations going forward.

But ALB is a world-class lithium miner and producer. So, if you’re a bear on Albemarle, you’re a bear on lithium. And by extension, you’re betting against the growth of EVs, the green energy transition, and next-generation technology products.

On that note, the quotes below come from Albemarle’s C-level management when speaking on the company’s February earnings call.

Notice the references to investments outside China, as well as to the various buzzwords that are on the receiving end of billions of dollars from the Biden Administration:

…We are planning investments in North America and Europe, where we estimate capital intensity to be more than double.

Second, by mid-decade, we expect to invest more in technology to produce advanced energy storage materials for next-generation batteries.

And lastly, we expect to invest in additional resource development. Across our capital spending, about 5% is linked to sustainability, including improvements to new and existing facilities…

Our biggest challenge is managing the tremendous growth opportunity that is in front of us…

Bottom line: If you’re looking for an interesting short-term-trade and long-term investment prospect rolled into one, give Albemarle a look.

Have a good evening,

Jeff Remsburg