This article was updated on Nov. 14, 2017, and originally published on May 1, 2017.

Lithium stocks have been having a great run since early 2016. Producers of the metal have been benefiting from increased demand and higher prices because supplies have been tight. This growing demand is largely due to the increasing popularity of electric vehicles, which are powered by lithium-ion batteries.

Most investors interested in gaining exposure to the lithium space should stick with investing in one or more of the large players listed on a major U.S. stock exchange: Albemarle Corporation (NYSE:ALB), FMC Corp. (NYSE:FMC), and Sociedad Quimica y Minera de Chile (NYSE:SQM), or SQM. Smaller players are speculative to varying degrees, and most are unprofitable.

There's something to like about each of these three big specialty chemical companies, but here are the two main reasons Albemarle is the best stock in the lithium sector for most investors, in my opinion. 

Brine containing lithium in front of a mountain.

Most of the world's lithium supply is found in salars, or underground salt lakes, and pumped to the surface. Image source: Getty Images.

1. It's closer than FMC Corp. to a pure play on lithium 

Most investors who want to invest in a lithium stock are probably looking for a company with a fairly decent exposure to lithium relative to the size of its overall business. After all, that seems the point if one is looking specifically for a lithium stock.

Here's how the three players stack up on this point.

 Company        2016 Lithium Revenue as a Percentage of Total Revenue           2016 Lithium Earnings* As a Percentage of Total Earnings         
Albemarle   25%  37.7% (of total adjusted EBITDA**)
FMC Corp.  8%  12.1% (of total operating profit)
SQM  26.5%  55% (of total gross profit)

Data sources: Numbers calculated by author using companies' 2016 earnings reports. *The companies use varying profit metrics for their segment results. **EBITDA = earnings before interest, taxes, depreciation, and amortization. 

FMC has some things going for it that make it potentially attractive, including that its restructuring efforts have been going well, and that it closed on its acquisition of DuPont's crop-protection business on Nov. 1, 2017. This business is widely regarded as being complimentary to FMC's existing agricultural chemical business. That said, FMC's lithium business accounted for only 8% of its total revenue and 12.1% of its total operating profit in 2016 -- both metrics much lower than Albemarle's comparable numbers. 

SQM's relative revenue exposure to lithium was about the same as Albemarle's in 2016, and its exposure based upon the earnings metric that it uses was even higher than Albemarle's number. The main reason SQM isn't as attractive a lithium stock as Albemarle for most investors is that the Chilean-based company has a considerably higher risk profile. The company was embroiled in political and financial scandals in the recent past. While these scandals appear to be behind it, SQM is still based in a developing country, so its political and financial risks remain higher than for companies based in developed markets. Moreover, as a foreign company, it has a greater exposure to currency fluctuations than the U.S.-based Albemarle and FMC. 

2. It's generally had the best revenue and EPS growth dynamics

Stock prices are generally propelled by growth in earnings per share (EPS), which in turn are usually powered by revenue growth, at least over the medium and longer terms. No matter if we consider three-year or five-year revenue and EPS growth, Albemarle comes out the winner. 

ALB Revenue (TTM) Chart

Data by YCharts. SQM hasn't reported Q3 2017 results, as of this writing on Nov. 14, 2017. 

ALB Revenue (TTM) Chart

Data by YCharts. SQM hasn't reported Q3 2017 results, as of this writing on Nov. 14, 2017.

Of course, past financial performance isn't indicative of future performance, but there's a good case to be made that in relatively stable industries, a company's past performance reflects its competitive advantages and how well its management has been able to capitalize on those advantages.

Investors shouldn't put much stock in Wall Street's long-term earnings projections, as they'll almost surely prove to be somewhat off. (In fact, they've already changed fairly significantly from when this article originally published in May 2017 to when it was updated in Nov. 2017.) However, to provide some context, as of Nov. 13, 2017, analysts estimate that Albemarle, SQM, and FMC will grow earnings at average annual rates of 15%, 32.5%, and 17.2%, respectively, over the next five years. 

What about stock price performances?

Investors shouldn't base their buy and sell decisions on a stock's past performance. However, most investors like to take in a stock's past performance to get the lay of the land, so here you go. 

The one-year returns have largely been powered by strength in the companies' respective lithium businesses. However, some of their other businesses -- notably agricultural chemicals -- have at least partially recovered from deep downturns due to tough market conditions, which has helped stock performances.

ALB Total Return Price Chart

Data by YCharts. SQM's stock price took off in July due to Reuters reporting that Chinese equity firm GSR Capital is exploring buying a substantial stake in SQM. 

Albemarle stock has performed the best over the five-year period, and is the only one of the three companies that outperformed the overall market. SQM's poor performance reflects the issues previously mentioned.  

ALB Total Return Price Chart

Data by YCharts.

Wrapping it up 

Albemarle is the best way for most investors to get exposure to the lithium space, in my opinion, because lithium comprises a solid percentage of its overall business, it's generally performed better financially than its two largest peers, and it doesn't have the higher risk profile that SQM does. 

Lithium demand should continue to increase over the long term, given the rising demand for batteries. However, investors need to be careful, as the large lithium stocks have had huge run-ups since early 2016, and could pull back considerably. Moreover, how well the stocks of these three companies perform going forward will depend substantially on the price of lithium -- and there's a good deal of uncertainty surrounding this factor.

Keep in mind also that Albemarle, FMC, and SQM are all diversified specialty chemical companies, so their financial and stock-price performances will depend on how well their entire businesses are performing. 

 

Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of Albemarle. The Motley Fool has a disclosure policy.