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Thursday August 05, 2010
SQM: Invest in the lithium boom
by Brandon Clay, editor Invest with an Edge  With the boom in global demand for alternative-fueled vehicles, now may be a good time to learn something about lithium.Lthium is the lightest and least dense of the solid elements. Lithium production has been growing for decades thanks to its use in small batteries. Powering a car with electricity takes more than a few AAA cells, but it can be done. The idea is increasingly popular as oil prices remain historically high. This is good news for Chile. This slender South American country is the largest lithium producer in the world. It is also good news for Sociedad Quimica y Minera de Chile ADR (SQM), often referred to by its English translation of Chemical & Mining Co. of Chile. 
The firm is a top holding in the first lithium-specific ETF. Obviously, the boom in lithium demand could be a boon for SQM. Driven by demand for hybrid and electric cars, lithium demand is expected to swell to 250,000 tons annually up from current levels of 100,000 tons. Wall Street is taking note of the bullish trend. Several analysts think SQM could make its way to $70, well above the $36 area where the stock currently trades. UBS analysts put a $73 price target on SQM earlier this year. SQM plans to invest $350 million to bolster its lithium production. This may lead some investors to look at SQM as a company focused solely on lithium, but that's not the case. SQM also offers investors significant exposure to increased global food demand. The company is one of Latin America’s top fertilizer producers. This highlights the diversity of SQM's business model. Investors are buying much more than lithium when they purchase SQM shares. That said, it looks like lithium demand is driving SQM, at least in the short term. The company recently company said it is talking with several Japanese automakers about their lithium needs. SQM trades at 23.5 times forward earnings, but that really isn't too rich as far as true growth stocks are concerned. SQM has undergone a strong runup in July and may be vulnerable to a short-term pullback, although it should find support at $34. To capitalize on rising lithium demand while still remaining diversified with fertilizer, go with lithium producer SQM. Learn more about this financial newsletter at Brandon Clay's Invest with an Edge. |
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