It’s the silvery-grey metal used to make batteries that power electric cars, mobile devices, and laptops. Yes, the increasing use of lithium is driving explosive global demand for the commodity.
However, like every sought-after product, companies seek to satisfy that demand – and that’s precisely what has happened. A glut of new lithium supplies entered the market following a rapid expansion of mines in Australia. Moreover, a cut in government subsidies for consumers of electric vehicles in China has dampened demand in the world’s largest electric car market. As a result, the Solactive Global Lithium Index, which tracks the performance of the largest and most liquid listed companies, has slumped as much as 16% this year.
Over the past two weeks, the index has regained some upside momentum as news surfaced that protesters had blocked access to several of the world’s highest-producing lithium mines in Chile. These disruptions to output appear to have helped alleviate some of the oversupply fears gripping the market.
Those who want to bet on a continued rise in lithium prices can gain exposure to the lightweight metal by trading the Global X Lithium & Battery Tech ETF (LIT) or by investing in lithium-focused companies Albemarle Corporation (ALB) and Sociedad Quimica y Minera de Chile S.A. (SQM). Let’s take a more detailed look at the exchange-traded fund (ETF) and both companies, along with several tactical trading strategies.
Global X Lithium & Battery Tech ETF (LIT)
Launched in 2010, the Global X Lithium & Battery Tech ETF seeks to provide similar returns to the Solactive Global Lithium Index. To achieve its objective, the fund invests the majority of its $457.09 million asset pool in stocks, along with American Depositary Receipts (“ADRs”) and Global Depositary Receipts (“GDRs”), that represent the benchmark. The ETF offers broad exposure to the metal by investing in global lithium miners and battery producers. LIT’s top three holdings by allocation weighting include Albemarle at 16.73%, Sociedad Quimica at 11.79%, and electric car maker Tesla, Inc. (TSLA) at 7.18%. A daily trading volume of over 100,000 shares, coupled with an average two-cent spread, keep trading costs low. As of Nov. 4, 2019, the fund issues a healthy 3.68% dividend yield and has a year-to-date (YTD) return of -6.17%.
LIT shares trended steadily lower between March and August, setting a 52-week low at $22.59 on Aug. 28. Sentiment has improved over the past two months, with price closing convincingly above a multi-month downtrend line in Friday’s trading session. Those who go long should anticipate an initial move to overhead resistance at $27.50, followed by a possible test of the $29 level. Manage risk by placing a stop-loss order either beneath Friday’s low at $25.11 or below Thursday’s intraday range.
Albemarle Corporation (ALB)
Albemarle manufactures and markets engineered specialty chemicals globally. The Charlotte, North Carolina-based company’s lithium segment extracts the metal from its salt brine deposits in Chile and the U.S. as well as its hard rock joint venture mines in Australia. Wall Street expects the $6.84 billion firm to deliver a third quarter (Q3) profit of $1.57 per share when it reports results on Wednesday, Nov. 6. The figure would represent year-over-year bottom-line growth of 19.9%. Analysts are also expecting the company’s revenues to have jumped 16.8% during the period. Albemarle recently closed a deal to buy a stake in an Australian-based lithium mine for $1.3 billion. However, the company has decided not to operate the asset until market conditions improve. Albemarle stock offers investors a handy 2.42% dividend, but its share price has depreciated nearly 15% so far this year as of Nov. 4, 2019.
A possible inverse head and shoulders pattern appears to be forming on the specialty chemical maker’s stock chart, with the structure’s left shoulder forming in June, the head in August, and the right shoulder this month. The formation typically indicates a market bottom and allows traders to enter at the start of a potential new uptrend. Furthermore, the relative strength index (RSI) shows a reading below 50, giving the stock ample room to test higher prices before consolidating. Those who do take a position should think about placing a take-profit order near the July swing high at $75.52 and cutting losses if price fails to hold above the Halloween low at $60.20.
Sociedad Quimica y Minera de Chile S.A. (SQM)
Chile-based Sociedad Quimica has significant operations in lithium, specialty potassium fertilizers, iodine, and solar salts. It extracts these materials through its caliche ore and salt brine deposits. When the basic materials company next releases its financial results on Nov. 20, analysts expect it to post Q3 earnings per share (EPS) of 26 cents, down from 32 cents in the September 2018 quarter. Although the stock has fallen short of bottom-line estimates in the past four consecutive quarters, Wall Street has a 12-month price target on the firm’s shares at $34.47 – representing a 20% premium to Friday’s $28.68 close. As of Nov. 4, 2019, Sociedad Quimica stock has a market value of $7.55 billion and trades down 22.53% on the year. A dividend yield of almost 4% helps to partially offset the weak price performance.
Since bottoming out on Aug. 23, the firm’s share price has recovered to trade above the 50-day simple moving average (SMA). More recently, the stock rallied 5.52% Friday and looks set to break out from a period of tight consolidation. Given that the stock has a short interest ratio of nearly 14%, such a move could trigger a short squeeze rally as sellers rush to cover their positions. Traders who buy at current levels should aim to book profits at either $32 or $36 – both crucial resistance levels. Protect capital by placing a stop order somewhere below the 50-day SMA.
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