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Without any context other than the price action, Piedmont Lithium (PLL) appears to be a compelling opportunity. On Monday, PLL stock closed up nearly 16% from the prior day’s session. Not only that, the robustness of the move suggests that a sentiment reversal could be in the cards.
Even with the pop, PLL stock is down more than 47% on a year-to-date basis. That goes to show you how steep the skepticism was prior to the swing higher. However, volume on the day was several magnitudes higher than the average, which may imply a paradigm shift. Also, using the point-and-figure chart analysis, Piedmont appears to have formed a triple top breakout pattern, which has significant bullish implications.
Driving the optimism in PLL stock is news that the underlying company received a mining permit from the government of North Carolina regarding its proposed Carolina Lithium project, located in Gaston County. Notably, the company remarked that its technical studies have revealed that the project could be a low-cost producer of spodumene concentrate and lithium hydroxide.
Fundamentally, the underlying commodity features significant implications for the electric vehicle rollout. Morningstar predicts that rising EV adoption and the buildout of energy storage systems should bolster lithium demand to surpass 1 million metric tons in 2024. Eventually, this metric could hit 2.5 million metric tons by 2030.
Adding more confidence to the story is the current analyst rating of Moderate Buy. This assessment breaks down as four Strong Buys, one Moderate Buy and four Holds. Further, the mean price target for PLL stock stands at $38. That implies about 159% upside potential from the most recent close.
Circumstances seem bullish, though investors likely need to be careful.
Bullish Options Activity Clashes with the Fundamentals
Following the ringing of the closing bell, PLL stock ranked as the second-most aberrant derivative activity in Barchart’s unusual options volume screener. This tool enables retail investors to understand what the smart money is focusing on. For Piedmont, its options volume hit a total of 17,860 contracts against open interest of 30,303. The delta between Monday’s volume and the trailing one-month average metric came out to 1,160.41%.
Breaking down the trades, call volume reached 12,275 contracts while put volume landed at 5,585 contracts. This pairing yielded a put/call volume ratio of 0.45, on paper favoring the bulls. Mathematically, the ratio shows that more traders are engaging calls options compared to puts. A peek at Barchart’s options flow screener shows that big block trades favor transactions with bullish sentiment, though not overwhelmingly so.
Given this setup, investors should exercise caution with PLL stock. Yes, the bulls are winning the battle, obviously. However, this is still a volatile investment and more than one day’s price action will be necessary to convince the rest of the market, especially if the institutional players are not decisively committed.
Another clue that warrants prudence is the intraday price action. Near the 11am ET mark, PLL stock peaked at $17.66. However, it would eventually drop to $14.43 before clawing back to the closing price of $14.68.
Don’t get me wrong – it’s still an impressive performance by PLL stock. However, it closed near the bottom of its range, which suggests that the bulls got cold feet.
Ultimately, though, what worries me the most is that pure-play EV investments have not performed well. For instance, Rivian Automotive (RIVN) suffered a significant blow, losing 8% on Monday. Sector leader Tesla (TSLA) wasn’t too far behind, losing almost 6% of equity value.
In my opinion, both stocks should be moving higher due to rising oil prices. Moreover, the latest flashpoint in the Middle East could imply global oil disruptions, depending on whether the conflict escalates. Yet EVs are still plunging, which is not a great sign downwind for PLL stock.
A Careful Approach is Probably Best
Rather than going all-in on PLL stock, a careful approach is probably the best move. For sure, the mining permit news is encouraging. And with that, analysts’ projection for the current fiscal year – earnings per share of 20 cents on revenue of $159.43 million, up from a loss of $1.14 on sales of $39.82 million last year – is much more credible.
However, PLL stock also trades at 6.17X last year’s revenue. Assuming successfully reaching the target of $159.43 million for this year, Piedmont’s sales multiple would be 1.78X. That’s still relatively high compared to the industrial metals and mining sector’s average revenue multiple of 1.58X.
For PLL stock to be undervalued, Piedmont would need to hit the most optimistic revenue target of $296.6 million. Then, shares would trade at a sales multiple of 0.96X. Still, you’d be talking about priced to perfection in a challenged ecosystem. Again, I think caution is key here.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
