Who can resist that headline? Louis Navellier is peddling his Emerging Growth newsletter by promising a special report called The Stock of the Century… so, naturally, we wanna know what that stock is.
And we don’t want to pony up $995 for an Emerging Growth subscription to find out, frankly — if we paid that much, we’d be inclined to believe anything he says, and we’d lose our ability to think rationally about whatever the investment is. That’s just human nature — buy a new dishwasher and, if you’re like most people, you’ll find reasons to love it and pat yourself on the back for making that decision… if you want to think critically about that dishwasher and it’s features and costs, you’re a lot better off doing that before you buy it.
So, as is our wont here at Stock Gumshoe, we’ll dig in, check out the clues Navellier drops in his ad to entice you, and fire up the Mighty, Mighty Thinkolator so we can figure out what the stock is. Then you can think about it yourself, form an understanding of the business and whether you think it might be worth researching further… if you want to subscribe to Louis’ Emerging Growth after that, well, be my guest (we don’t subscribe to newsletters that use teaser ads ourselves, in an effort to be fair to all and not give the Thinkolator too much of an advantage, but we do collect subscriber reviews and ratings of many newsletters — if you’ve ever tried out Navellier’s Emerging Growth, please click here to share your thoughts with your fellow investors).
What’s the story? As with many ads we’ve seen over the past few years, the driver is Tesla and the big push from pretty much all other automakers to build and sell more electric cars. Here’s a taste of the ad:
“The Greatest Profit Opportunity of the Century
“Thanks to this breakthrough, auto analysts predict electric car sales will jump 70 times in 28 years—surpassing gas-powered car sales for the first time in history.
“Early investors stand to reap windfall profits as electric car sales hit $7 trillion by 2050. You can be one of them. Here’s how….
“… the technology behind the electric car revolution isn’t just a game changer; it’s the game changer. It’s set to create a whole new set of millionaires.
“If you get in on the ground floor now, you can become one of them.
“This is why Chevrolet, BMW, Ford, Toyota, Kia, Mercedes Benz, Fiat Chrysler, Honda, Volvo, Mitsubishi, and Porsche are racing to catch up with Tesla, as the value of these car sales will reach $7 trillion by 2050.
“In a moment, I’ll tell you about the breakthrough technology, the millionaire-making company behind it, and how it could hand you Amazon-, Apple-, and Netflix-like gains over the next 20 years.”
That’s what we all want in an investment, right? The chance to be in on the ground floor, make ludicrous returns, and become layabout philanthropists in our dotage? You can see why this kind of ad really squeezes those greed glands and gets folks to cough up their credit card details.
“Long term, a $10,000 investment could grow well into seven figures….
“Thanks to this breakthrough, auto analysts predict that more electric vehicles than gas-powered cars will be sold in 2040. What’s more, by 2045, they forecast that 90% of all cars sold will be electric cars….
“When you consider that there are only two million electric vehicles on the road today, you’re looking at an increase of 499%!
“Virtually every single one of these cars will be powered by this company’s breakthrough technology.”
A “breakthrough technology,” eh? That sounds compelling. What is it? More from Louis…
“So What Exactly Is This Breakthrough Technology?
“It’s the one that will power one billion electric vehicles by 2050….
“You see, for every electric car to roll down the road, it must have one thing: a battery.
“Not just any battery, but one that gives you the same range and cost of ownership as a gas-powered car….
“Here’s where the big profit opportunity lies.
“According to the Bloomberg New Energy Finance forecast, ‘The world may need the equivalent of 35 of the so-called Gigafactories like the one built by Tesla founder Elon Musk in Nevada over the next 13 years to meet the power demands of electric cars’ ….
“Ironically, the big money won’t be made in building batteries… but by supplying the raw materials that power them…..
“The batteries that will power the electric car revolution are powered by lithium. Without getting too technical, lithium is a chemical element that generates twice as much power as its counterparts and can be recharged over and over again.
“It is, as the Financial Times puts it, the ‘vital battery material’ that is driving the electric car revolution.
“The element is so critical in the production of the electric car that Goldman Sachs calls it ‘the new gasoline.'”
So that’s what he’s actually hinting about as this “ground floor” opportunity in electric cars… a lithium producer.
That’s always a challenge, because you can certainly create fortunes from producing commodities — just ask John D. Rockefeller about his oil business, or Andrew Carnegie about whether the tough and dirty steel business is profitable — but it’s rarely easy or fast. Commodity producers aren’t hyper-growth or scalable in nature, usually, they’re tough businesses that are dependent on heavy industrial equipment and lots of people and the depletion of their assets.
I’m going to oversimplify a little bit here, but this is a sector where most players lack brands or cachet or other qualities that would lead consumers to pay more for their version of the end product than they would for anyone else’s — one ingot of iron or ounce of gold or tonne of lithium carbonate is essentially the same as any other, that’s what “commodity” means, so they lack pricing power unless they are monopoly producers (the MBA folks would say they are “price takers,” not “price makers”).
Big gains in commodity-producing businesses come not because the company has a hot new product to introduce, or a powerful brand, or even a “new technology” (though new technologies, like fracking in oil and gas, can certainly reduce costs), but because they either make a big new discovery that creates value out of nothing (turning empty wilderness acreage into gold by digging up the land and processing it, for example), or because the supply and demand for that commodity get out of balance and the prices go soaring, creating windfall revenues that are higher than they planned (the reverse, of course, can happen as well — just ask oil producers whether the price they were paid per barrel was lower in the Fall of 2014 than it was in the Spring of that year).
Sorry, I get off track sometimes — I know many of you know all of that, but plenty of brand-new investors wander by these parts from time to time (or get Louis Navellier’s ads), so I can’t help but stand up on my soapbox from time to time to do some lecturing.
But let’s get back to the ad… what is it that Navellier thinks is the lithium stock we should buy? Let’s sample a little more of his ad:
“In order to meet worldwide demand for lithium, ten new major mines are needed. When you consider it can take as much as $2 billion and five years to construct just one lithium mine, you can see why palms itch in anticipation of the profits to be made.
“As a result, our No. 1 lithium producer is going to reap almost obscene profits. It’s no wonder. It’s the 800-pound gorilla of the industry with a 21% market share.
“That’s why I’ve never been more certain of anything in my nearly 40-year career as an investment advisor that our top-rated lithium stock is another millionaire maker.”
And then Navellier strains his credibility a little bit:
“Here’s the best part:
“No one is talking about lithium right now. It’s totally off the radar.
“That’s because Wall Street is focused solely on Tesla and NOT on the companies that are powering this electric car revolution.
“In other words, this is a pure ground-floor opportunity… and Wall Street is clearly looking the other way.”
OK, so folks probably aren’t chatting up lithium stocks at most of the cocktail parties you attend these days (they’re probably talking about Bitcoin or the latest cryptocurrency, frankly), but that certainly doesn’t mean it’s “off the radar.”
So what is this “800-pound gorilla?” With those clues, scant though they are, it can really only be Albemarle (ALB), which has indeed become the only real lithium-focused “blue chip” stock in the market over the past couple years (though SQM and FMC might argue that point a little bit). SQM matches the clues as well, but is a much less attractive growth stock by most measures… though I confess that although both are buys according to Navellier’s Portfolio Grader, SQM is higher-rated than ALB in that system, despite having better cash flow and revenue metrics (Navellier prizes earnings momentum and analyst estimate increases, so perhaps that’s ticking SQM over the top, who knows).
Albemarle is a large and profitable specialty chemical company, with a $12 billion market cap and a pretty healthy profit margin, so it’s not perhaps as exciting as the little guys, and it doesn’t get the “teaser” treatment from newsletters as often as the junior hopefuls, because it doesn’t have that “this might go up 500% in a year” potential that gets everyone drooling (though it has certainly been promoted by newsletters quite a few times — JR Crooks teased it last year, and Lou Basenese might have as well). It’s perhaps a boring one, compared to jumpier juniors, but sometimes boring is good — and that’s a relative term, thanks to rising lithium prices the stock has doubled over the past couple years after a long period of “meh” performance.
Albemarle is a good and “real” company, and they have reorganized over the past few years to focus more on lithium, which is probably why they’re taking the lead over the less effectively-run firms like SQM or FMC. It’s not particularly cheap, with a forward PE in the low 20s and analyst-forecasted earnings growth of roughly 10% a year, but you can certainly argue that it’s reasonable priced for those who are convinced that lithium prices and demand will be soaring in the years to come (as seems eminently logical, assuming no global recession).
The challenge for Albemarle, I would assume, comes not just from their expanding lithium production (the most important thing for them of late, I think, is that they’ve been able to increase the size of their quotas in Chile, the heart of lithium country, largely at the expense of SQM, which is a political football in its home country), but from the fact that most of their revenue doesn’t come from lithium — it comes from other specialty chemicals, so lithium has been providing much of their growth, but they’re also certainly a cyclical company, a lot of their revenue will depend simply on the level of economic activity in the world.
Still, Lithium is growing fast enough that it’s quickly becoming even more important for Albemarle, at least right now — Lithium generated 33% of Albemarle’s revenue in the last quarter, and more than 50% of EBITDA and earnings, and for more than a year now it has generated essentially all of Albemarle’s growth. The growth trend is such that this will continue… Lithium is growing thanks to both higher production and higher prices, but their other substantial divisions (PCS, bromine, refining solutions) are, as a group, pretty flat over the last year while. You can get a pretty good handle on this by checking out Albemarle’s latest quarterly investor presentation here.
Will Albemarle be the “greatest profit opportunity of the century?” I have no idea. It’s the easiest and probably safest lithium investment, though that also means it has less upside than the little upstarts and explorers, but the lithium market could easily change over the coming years as well, either because batteries get designed to use less lithium, or because the ramp-up in supply (every single producer and explorer is at least as informed as us investors when it comes to the “we need more lithium because of electric vehicles” trend, and they’re all trying to increase production… which can certainly lead to overproduction).
Things rarely move up in a straight line, and lithium is not all that hard to find or rare, it’s just that it takes money, expertise and time to develop lithium projects (most of which, like Albemarle’s, are relatively low-cost brine operations in the Andes or spodumene hard-rock mines in Australia).
My guess is that the analysts are probably being fairly conservative when it comes to the lithium prices they put in their models as they generate earnings projections for Albemarle, since no one thanks them for overestimating earnings — so that would be the most likely source of another surge for Albemarle stock, if lithium prices exceed expectations over the next couple years and give them room to substantially beat those forecasted earnings numbers of roughly $5 per share in 2018 and $5.67 in 2019.
And that’s about all I can tell you about Albemarle, other than “I wish I had bought it last year”. I don’t currently have any lithium investments in my portfolio, though I’ve been watching startup Orocobre for a while (and may have missed my chance on that one, given the jolt the stock got from their optimistic forecasts today).
So I’ll turn it over to you, dear readers — whaddya think? Like the idea of buying the “800-pound gorilla” when it comes to lithium, or are you more inclined to look at the little guys who might go bonkers if prices rise? Or is the whole lithium supply/demand consensus a little too “consensus-y” for you? Maybe you’re thinking about all that supply keeping a lid on lithium, or looking for the next post-lithium battery technology to emerge? Let us know with a comment below. Thanks for reading!