Sentiments for lithium stocks are possible the most bearish in the last 24 months. From being a hot sector, the sentiments have changed to fear and investors are unwilling to buy quality lithium stocks even at deeply undervalued levels. However, in my view, it’s time to be a contrarian and look at lithium stocks for long-term growth.
It’s worth noting that depressed lithium prices have translated into lower investments in lithium projects. Once demand is back, this is likely to translate into a tight supply-demand scenario. Last year, analysts opined that lithium shortage can be due as early as 2025.
Further, the supply deficit is likely to widen further by the end of the decade. If this scenario holds true, lithium has significant upside potential in the coming years. I would therefore take a brave stance and consider exposure to quality lithium stocks with an investment horizon of five years.
This column discusses three lithium stocks to buy and hold for multibagger returns potential.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) was on a high-growth trajectory before the plunge in lithium prices. With growth deceleration and scaling-back of expansion plans, ALB stock has corrected by 35% for year-to-date. The lithium stock looks undervalued and offers a dividend yield of 1.72%.
The most important point to note is that Albemarle has a strong balance sheet. As of Q1 2024, the company reported a strong liquidity buffer of $3.7 billion. Further, according to bank covenants, the net-debt-to-adjusted-EBITDA is at 0.9.
Albemarle has continued to focus on cost cutting and is on-track to deliver $280 million in cost benefit this year. Therefore, when Albemarle emerges from challenging times, there will be ample financial flexibility for aggressive investments.
As a matter of fact, the company continues to guide for lithium sales volume growth at a CAGR of 20% through 2027. I also believe that the markets have discounted the EBITDA compression in current prices. The downside is therefore limited and there is significant upside potential for ALB stock.
Lithium Americas (LAC)
Lithium Americas (NYSE:LAC) is a deeply undervalued name among lithium stocks for long-term growth. For year-to-date, LAC stock has plunged by almost 60%. Negative industry sentiments coupled with equity dilution have impacted the stock. I see current levels as a gold opportunity to accumulate with an investment horizon of five years.
It’s worth noting that Lithium Americas is the owner of the Thacker Pass asset in the United States. The asset has an after-tax net present value of $5.7 billion. In comparison, Lithium Americas commands a market valuation of $570 million.
Another big positive for Lithium Americas is that the company has secured funding for project construction. Last year, General Motors (NYSE:GM) entered into an offtake agreement with Lithium Americas. At the same time, GM committed to invest $650 million in two tranches. Earlier this year, the company received conditional commitment from the U.S. Department of Energy for a loan of $2.26 billion. Therefore, once industry sentiments reverse, LAC stock is likely to skyrocket from oversold levels.
Piedmont Lithium (PLL)
Piedmont Lithium (NASDAQ:PLL) stock has witnessed a meltdown of 83% in the last 12 months. At a current market valuation of $180 million, the company is deeply overvalued. If lithium surges higher in the next few years, investors can expect 20x to 30x returns from current levels.
For Piedmont Lithium, the biggest positive is the value of the underlying lithium assets. For now, financing the construction of these assets is a challenge and the stock is depressed. However, once lithium trends higher and Piedmont can secure financing through debt or joint ventures, PLL stock is likely to skyrocket.
To put things into perspective, Piedmont has 100% ownership in the Carolina and Tennessee assets. Both these assets have a combined after-tax net present value of $4.5 billion. I must add that these assets are likely to deliver an annual steady-state EBITDA of $834 million. Further, the company has 50% stake in the Ghana asset that has an after-tax NPV of $1.3 billion. Clearly, considering the asset potential, PLL stock can go ballistic.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.