In rough markets where commodity prices are sliding, it can be difficult to get excited about materials stocks and the related ETFs, but the Global X Lithium & Battery Tech ETF (NYSEArca: LIT) may be one to reconsider.
LIT, which is nearly nine years old, tracks the Solactive Global Lithium Index. The underlying index is designed to measure broad-based equity market performance of global companies involved in the lithium industry.
“We now expect 2020 demand to be flat to slightly down depending on the length of plant shutdowns. However, lithium supply has been affected because of production shutdowns and delays,” said Morningstar analyst Seth Goldstein in a recent note. “We have already modeled in lower production expectations for Albemarle (ALB), Livent (LTHM), and SQM (SQM) in 2020 and maintain our current forecasts for the three companies. Over the medium and long term, we expect little impact to lithium supply and demand.”
Why It’s Important
Steadiness in Albemarle and SQM is vital to the outlook for LIT because the fund allocates a third of its weight to those two names. Plus, those stocks are now attractively valued.
“Narrow-moat Albemarle, Livent, and SQM are trading in significantly undervalued territory, with all three at 5 stars, and we see current prices as a great entry point for long-term investors,” according to Morningstar. “Current lithium stock valuations imply an extended impact to lithium producer profits, worse than we model in our bear case. Our bear case for lithium assumes permanently lower lithium prices and indefinitely delayed capacity expansions, both of which lead to sharply lower long-term producer profits.”
With the popularity of electric vehicles spurring demand for automobile offerings from carmakers like Tesla, the lithium industry has taken a new turn. More uses will be found for lithium as the move to energy dependence from fossil fuels continues to increase demand for efficiency. However, there’s much more to the lithium story than electric vehicles.
Global automotive industry observers believe electric vehicles will reach comparable price points to traditional internal combustion engine vehicles sometime in the next several years, making it more compelling for drivers to make the switch to electric vehicles.
“While all three producers trade at compelling valuations, Albemarle is our top pick because of its feedstock diversification,” according to Morningstar. “Albemarle has low-cost lithium feedstock assets in Chile and Western Australia, which should somewhat insulate the firm’s production versus SQM and Livent, which operate from a single feedstock source, in Chile and Argentina, respectively.”