Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Are lithium stocks overpriced?

Coming into 2018, a lot of analysts thought so, as indicated by multiple instances of analyst downgrades of lithium mining giants such as Albemarle (NYSE:ALB) and Sociedad Quimica y Minera de Chile (NYSE:SQM). Lithium stock prices have suffered as a result, with Albemarle shares falling more than 25% over the past year, and SQM down 16%.

And yet, one stock analyst feels confident that SQM stock, in particular, is not overvalued, and bound to go higher. Here's what you need to know.

Lithium salt evaporation ponds

China thinks SQM stock is worth its salt. Image source: Getty Images.

Upgrading SQM

This morning, two of my favorite sources for stock ratings, StreetInsider.com (subscription required) and TheFly.com, both confirmed that British investment bank HSBC has upgraded shares of SQM from hold to buy. Neither ratings-watcher was able to say how much HSBC expects SQM to go up in value -- or indeed, to give any details on the upgrade whatsoever.

But I have a hunch we can guess at the why HSBC may be upgrading SQM.

China loves lithium

Last week, Chile's national stock exchange announced that NYSE-listed Nutrien (NYSE:NTR), which is the fertilizer miner formed earlier this year by the combination of Potash and Agrium, had informed it of a plan to auction off the 23.77% stake it owns in SQM. Nutrien was said to be seeking a minimum bid of $65 a share, which was a surprisingly high figure, because SQM stock was selling for only $43 at the time.

Nevertheless, that's the price that Nutrien said it wanted for its large stake in SQM, and as it turns out, it's also the price Nutrien got.

This morning, Reuters reported that the world's fourth-largest producer of lithium metal, China's Tianqi Lithium, has won Nutrien's stake in SQM. Bidding the desired $65 a share, Tianqi ended up acquiring the 23.77% minority stake in SQM for $4.07 billion.

What it means for the lithium market

Reuters notes that Tianqi is a significant force in the global lithium market. In addition to producing lithium on its own, Tianqi's Talison Lithium subsidiary is also a joint venture partner with the world's No. 1 lithium producer, Albemarle, which is the majority owner of the world's biggest single lithium mine.

By my estimation, today's sale leapfrogs Tianqi past SQM and into a de facto position as the No. 2 lithium producer in the world. Tianqi is still some ways behind Albemarle, but it's clearly closing the gap.

What it means for investors in SQM

Investors are reacting to news of today's sale by bidding up SQM nearly 5%. But even so, at a share price of just $46, SQM is selling for a significant discount to the $65 a share that Tianqi just paid. Does this mean, therefore, that HSBC is right about SQM stock being a buy? Does it mean, perhaps, that SQM should really be selling for $65 a share, not $46 -- and that there's therefore 41% upside still left in SQM stock?

Not necessarily.

The reason: Tianqi was clearly willing to pay a premium for Nutrien's stake in SQM. Tianqi did this in order to help it corner the market on lithium, which is a key resource for manufacturers of electronics, of renewable energy such as solar and wind power, and of electric cars as well. In short, this was a strategic purchase that Tianqi made -- and one probably directed by the Chinese government as a means of ensuring access to an unrestricted supply of lithium for Chinese industry.

To Tianqi -- and to China -- securing that interest was probably worth paying a 41% markup to what SQM stock is objectively "worth." Unless, however, you have a similar opportunity to corner the market on lithium, SQM probably isn't worth $65 a share to you ­-- ­and if you ask me, $65 probably won't become the open-market price for SQM for some time to come.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.