When you follow markets and the news around them for a living as I do, you sometimes start to sense a theme and it seems that a lot of what you read, see or hear feeds into that narrative. When that happens, it is important to be aware of confirmation bias. You must ask yourself whether you are interpreting stories to support a preconception, or whether an objective analysis of diverse stories really does support a theory. I have been feeling that recently when it comes to lithium miners, and a couple of stories that broke overnight had me feeling it even more. And this doesn’t look like a case of confirmation bias. There really is a lot of news that suggests that lithium stocks, once the poster children for crazy valuations, are undervalued.
From a big picture perspective, the Russian war in Ukraine and the huge spike in oil prices last year led to lots of talk from politicians around the world about supporting the switch to EVs. Talk, of course, is cheap, but tax incentives and subsidies on a global scale can go a long way towards offsetting the price differential between EVs and gas-powered vehicles. Just as importantly, advances in charging technology and a rapidly expanding network of chargers are making EVs much more practical now than they were just a few years ago in terms of range and charging time.
Still, stocks in both EV companies and lithium miners had a hard time of it last year. The granddaddy of them all, Tesla (TSLA), for example, dropped from a high just above $384 in April to close out 2022 at around $123. Others not as far down the line to mass production, such as Rivian (RIVN) and Lucid (LCID), performed at least as bad, if not worse. That inevitably dragged lithium stocks lower, too, with the most recognizable names like Lithium Americas Corp. (LAC) and Livent (LTHM) both trading at around 50% of their 2022 highs by year’s end.
There were a lot of reasons for that. In the case of the vehicle manufacturers, there was the market’s aversion to growth stocks with high P/Es as the Fed hiked rates. There was also the “zero-Covid” policy in China that effectively shut down that important market, and fears of a deep recession here in the U.S. and globally that would hit vehicle sales generally and encourage buyers to make more conservative choices. The tighter money is, the less important environmental concerns tend to become in most people’s buying calculations.
Then there was the simple fact that anything EV related got ahead of itself in 2021 and early 2022. Even companies who had yet to prove that they could operate profitably saw their stocks trading at three-figure multiples, even more in some cases, of earnings projected to be reached many years from now. Something had to give, and it did.
However, things are very different now.
In China, as Alibaba (BABA)’s earnings this morning showed all too clearly, the easing of Covid restrictions has caused a surge of pent up demand for consumer goods. That will presumably include big ticket items and create more demand for EVs in that important market. Here in the U.S., the market has recovered over the last couple of months as fears of a deep recession have declined, lessening the economic argument against EVs. At this point, with the probable exception of TSLA, it is hard to know which manufacturers will be the biggest beneficiaries of that, but lithium miners can benefit whoever wins.
That is even more clear after Lucid’s earnings report this morning. That company have had some execution problems, but say the answer is to ramp up output this year. That is the view of most companies in the space. Nobody, it seems, is worried about there being enough demand for EVs to justify that. That may or may not turn out be realistic, but output is going up, regardless. Meanwhile, all those vehicles need batteries, and those batteries need lithium.
So, how should investors play that? My preference would be for Livent. They are a pure play lithium miner who are profitable already, something unique in the space. If nothing else, that means that investors can look at conventional metrics to assess value and, when they do, they will see a lot of it. LTHM is currently trading at below thirteen times forward earnings, a discount to the broader market, but it is when the growth potential is factored in that the value is really apparent. The stock has a P/E to growth (PEG) ratio of 0.46 and, lest you aren’t aware, a PEG anywhere below 1.0 indicates that a stock is undervalued.
It is actually quite ironic to point out value in lithium mining stocks. A year ago, the opposite was true, with sky-high P/Es the norm. At the end of March 2022, for example, LTHM had a trailing P/E of just over eight thousand! However, as prices have fallen, so some of the potential for EV demand is being realized, or at least conditions are improving to where it can be. The pendulum has therefore now swung too far the other way, and lithium miners, once among the most overvalued stocks in the market, are now looking cheap.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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