Piedmont Lithium Shares May Have Been Lifted Too Fast

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Australia-based mining company Piedmont Lithium (NASDAQ:PLL) got a major shot in the arm when the company confirmed a binding agreement with Tesla (NASDAQ:TSLA). Piedmont Lithium stock cheered this development, sending the shares up nearly 400% at one point.

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Momentum-oriented traders will probably look at this and see a shooting star. However, not everyone necessarily shares this perspective. Indeed, a contrarian outlook might characterize the move in Piedmont Lithium stock as overdone.

There’s also the efficient market theory to consider. In other words, it’s entirely possible that all of the good news, including the assumption of higher revenues for Piedmont Lithium going forward, have already been priced into the shares.

All of this doesn’t mean that Piedmont Lithium is a bad company. It’s just a cautionary note for overzealous traders with a penchant for chasing runners. Instead of following the crowd, you might want watch, wait and let gravity take over.

A Closer Look at Piedmont Lithium Stock

When a stock shoots up nearly 400% in a single trading session, it will get two different reactions from onlookers. Some folks will claim that this type of price action is massively bullish. Others will expect a pullback.

Only time will tell which side of the debate is right. However, it does appear that the bubble in Piedmont Lithium stock might already be bursting.

Consider, for one thing, that Piedmont Lithium stock’s 52-week range is $4.00 to $54.50. This suggests that the stock’s run may already be overextended. Furthermore, the bulls attempted to push the stock to $50 and keep it there not just once, but twice.

They tried in late September and then again in early October, but failed both times. The implication here is that there are sellers ready and waiting to pounce on Piedmont Lithium stock.

It’s also noteworthy that the trailing 12-month earnings per share for Piedmont Lithium stock is -$1. Thus, there appears to be a worrisome divergence between the share price and the company’s actual earnings.

Not Really Finalized

There’s an old saying in the markets. That saying is, “Buy the rumor, sell the news.” It’s basically an observation that forward-looking market participants tend to bid up the price of stocks based on developments that aren’t even finalized yet.

Then, if the event doesn’t turn out as planned, the stock price can plunge. I’m fearful that this could happen to Piedmont Lithium stock as I suspect that not everyone read the terms of the Tesla agreement carefully.

As the press release explains, “The Agreement is conditional upon Tesla and Piedmont agreeing to a start date for spodumene concentrate deliveries between July 2022 and July 2023 based on the development schedules of both parties.”

Schedules aren’t always easy to coordinate, and July 2022 is still a long way off. There’s plenty of time for things to fall apart before the time frame negotiations even begin.

It’s Make-or-Break

So, anyone chasing Piedmont Lithium stock at the currently lofty level had better hope that everything works out according to plan. It only takes one problem along the way to grind negotiations to a halt.

There’s an awful lot at stake here for Piedmont Lithium. As per the arrangement, roughly one-third of Piedmont Lithium’s planned spodumene concentrate production for the five-year term will be devoted to Tesla.

Plus, the sales to Tesla of that same spodumene concentrate “are expected to generate between 10-20% of Piedmont’s total revenues from its proposed integrated mine-to-hydroxide project for the initial five-year term.”

To put it bluntly, this deal is all fine and good for Tesla, but it’s make-or-break for Piedmont Lithium. There’s really no “in between” here. Piedmont Lithium stock chasers need to understand that it will be terrible news for this company if the agreement breaks down.

The Bottom Line

When all of the good news has already been priced into a stock, the results for latecomers to the trade can be disastrous.

Piedmont Lithium stock could easily keep going up, no doubt. Still, please be careful with this stock. It would only take one piece of bad news for the sellers to come rushing in.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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