Does The Lithium Rally Have Legs? This One Stock Might

After a tough stretch for lithium stocks, recent developments suggest the sector might have finally found its bottom. Shares of key lithium producers, including Albemarle (NYSE: ALB), Arcadium Lithium (NYSE: ALTM), and Sociedad Quimica y Minera (NYSE: SQM), surged recently following reports that mining giant Rio Tinto (NYSE: RIO) is eyeing a significant acquisition in the lithium space. 

The rumor, reported by The Australian, speculates that Rio Tinto could follow in the footsteps of BHP (NYSE: BHP) and make a bold move in the lithium sector as part of its low-carbon materials portfolio. This has reignited optimism around lithium stocks, which have been beaten down due to falling lithium prices and weakened demand for EVs.

The Global X Lithium & Battery Tech ETF (NYSEARCA: LIT), which holds some of the companies above, is up over 30% in the past month and testing the upper resistance line of its multi-year downtrend (red):

Adding fuel to the rally, China’s latest stimulus package — its largest since the pandemic — has boosted lithium prices. China, which accounts for over half of global EV sales, is expected to drive even more demand for lithium as it works to maintain its leadership in the electric vehicle market. With this stimulus package, many analysts believe lithium prices will stabilize and recover, after hitting rock bottom in August.

On that news, it’s worth taking a closer look at the lithium stock that’s screening best according to our models right now: Sociedad Quimica y Minera, or the Chemical & Mining Co Of Chile (NYSE: SQM)

SQM is the largest lithium producer in South America. It distributes specialty plant nutrients (fertilizers), iodine and its derivatives, lithium and its derivatives, potassium chloride and sulfate, industrial chemicals, and other products and services.

Currently, the valuation may be very attractive relative to the market and other lithium stocks:

• SQM ($42.66) is trading below its intrinsic value of $56.45, according to an updated version of Benjamin Graham's Formula from Chapter 11 of "The Intelligent Investor"
• SQM is good value based on its earnings relative to its share price (13.2x), compared to the US market average (26.63x)
• SQM is good value based on its earnings relative to its share price (13.2x), compared to the US Specialty Chemicals industry average (32.9x)

Earnings are also on track to grow quickly, at an exceptional rate of 31.42% per year.

Click here to analyze SQM stock.

Currently, top analysts we track are mixed on the stock, resulting in a Hold rating overall:

However, these ratings may not reflect the most recent sector developments. Stay on top of the latest ratings — bookmark this page to see the latest analyst price forecasts and ratings for SQM.

Before we wrap up, there might be one other reason to put lithium stocks on the watchlist for now, rather than jump in with both feet. That’s because there’s a possible catalyst for lithium to either the upside or downside coming this week, with Tesla (NASDAQ: TSLA) unveiling its latest self-driving and robo-taxi news on Thursday, October 10. 

As one of the world’s leading EV makers and a lithium refiner itself, Tesla could easily send the EV and lithium market higher or lower following this event. So for investors looking to avoid extra volatility, it may be better to watch these stocks for now until after the Tesla announcement shakes out.

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