What happened

Lithium stocks have looked every bit of Jekyll and Hyde in the last two years. Shares of Albemarle (NYSE:ALB) rose over 48% in 2017, but the stock fell nearly 40% last year, according to data from S&P Global Market Intelligence. The stock has given up roughly 10% of its value since the beginning of 2017.

It's not obvious from the stock performance, but Albemarle turned in a solid year of operations last year. Through the first nine months of 2018, the business delivered revenue growth of 10%, increased gross profit 12%, and enjoyed a 27% bump in operating profit (excluding the benefit from an asset sale) compared with the year-ago period. 

Knowing that, it's easy to see that Albemarle stock was simply cooling off after being handed a healthy premium in 2017, although now it appears to be a little on the undervalued side.

A declining pink arrow drawn on a chalkboard.

Image source: Getty Images.

So what

At any given time, there seems to be a popular investing theme or two that captures the imagination of investors and, inevitably, gets a little detached from reality. A few years ago there was 3D printing. Right now there's gene-editing and marijuana stocks. And in 2017 there was lithium.

Albemarle stock finished 2017 trading at nearly 30 times future earnings -- a decent premium even in a historically expensive stock market. Investors obsessed over projections that electric vehicles were about to set foot on exponential growth curves by the mid-2020s. That would cause a significant increase in global demand for lithium, which is needed to manufacture lithium-ion batteries capable of powering electric vehicles.

Lithium stocks took a nose dive right out of the gate last year. In February 2018, analysts at Morgan Stanley published a report suggesting that future lithium demand will fall short of the wild projections floating around. Albemarle took the report in stride, working throughout the year to present its own internal data on customer orders that stretch as far as 2030. It didn't help to move the stock price, but investors should find comfort knowing that over 80% of the company's projected supply in 2021 is entered into supply agreements.

Now what

Albemarle's business is stronger than ever, including its "other" two segments, which investors often overlook. The long-term growth profile of lithium appears to be pretty air-tight, especially considering global automakers have dozens of electric vehicles in the works. And right now the company's stock is trading at just 12.5 times future earnings. That's cheaper than smaller peers Livent, trading at 13.4 times future earnings, and Sociedad Química y Minera de Chile, at 18.9. Given the diversity of the business and its exceptional lithium reserves, this lithium stock is certainly worth a closer look in early 2019.

Check out the latest Albemarle earnings call transcript.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.