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Investors Business Daily
Investors Business Daily
Business
JED GRAHAM

IBD Stock Of The Day: Lithium Play SQM Springs Bullishly Off Key Level

Sociedad Quimica y Minera de Chile is Tuesday's IBD Stock Of The Day as the lithium supplier bounces bullishly off support. SQM stock's strong bounce above its 50-day moving average is flashing an early entry opportunity, but whether to seize it is an open question in the current stock market environment.

SQM is part of the flagship IBD 50 portfolio of leading growth stocks. It isn't just a standout in the overall market; SQM stock also stands out from peers like Albemarle and Livent, both of which lost traction after recent rallies. Also a major fertilizer play, SQM stock is looking much stronger than CF Industries and others in that space.

Lithium Price Debate

SQM, like Albemarle and Livent, has benefited from huge lithium price increases. That comes amid relentless demand for the lithium-ion batteries that power electric vehicles. Yet there's some dispute about where lithium prices are headed. Goldman Sachs went out on a limb recently, predicting that prices could crash by 70% over the next year as a lithium surplus emerges.

Albemarle's big rally in May came partly because the company said it would be more exposed to market prices, rather than fixed prices that preceded lithium's big surge. Yet that variability in contract pricing would hurt if lithium prices tumble.

SQM's Lithium Ramp

The likely reason why SQM stock has mostly withstood such doubts, which may be misplaced, is that the company is ramping up output much faster than its peers.

SQM says sales volumes should reach 140,000 metric tons of lithium carbonate and lithium hydroxide in 2022, up from 101,000 in 2021. By the end of this year, SQM's annual run rate should reach 180,000 tons. An additional 70,000 tons of capacity is seen coming online in Chile and via an Australian joint venture in 2023 and 2024.

So SQM's near-term results won't just depend on lithium prices. Also, SQM isn't just a lithium play. It's also the largest producer of potassium nitrate, used for fertilizer, and a leading producer of iodine.

Not too long ago, SQM was seen as a joint fertilizer and lithium play. But SQM's lithium revenue exploded by 970% from a year ago to $1.446 billion in Q1, accounting for 72% of the total.

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SQM Stock

SQM stock jumped 3.65% to 93.59in Tuesday's stock market action, albeit in light volume. The move came after SQM stock had found support at its 50-day line late last week.

Tuesday's move represents a break above the trend line coming down from SQM's 115.76 all-time high on May 27. For aggressive investors, SQM's latest move is flashing an early entry point. Traders might want to wait for SQM stock to get above its 21-day moving average first.

In addition to finding support at its 50-day line, SQM stock is now in range of its earlier 90.97 buy point.

No question, SQM has been a standout with a superlative 99 Relative Strength Rating, meaning it has outperformed 99% of all stocks over the past 12 months.

Yet, prior to its February breakout, SQM went through a yearlong consolidation. Now, with its pullback to its 50-day, SQM looks like a reasonable risk.

But while SQM stock is looking strong, investors should be extremely cautious about buying anything in a bear market, despite Tuesday's broad advance. That other lithium and fertilizer plays, such as Albemarle and CF Industries, are struggling somewhat also raises some concerns.

Be sure, though, to read IBD's The Big Picture every day to stay in sync with the market direction and what it means for your trading decisions.

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