Shares of lithium producer Albemarle (ALB 2.59%) increased by an almost unbelievable 45% in November according to data from S&P Global Market Intelligence. Including that massive gain, the stock gain over the first 11 months of 2020 was an impressive 86%. For comparison, the S&P 500 Index, using the SPDR S&P 500 ETF as a proxy, was up just 12.5% over that span. That suggests things are going extremely well for Albemarle, but they aren't.
The stock's November rally started roughly at the same time the company reported earnings early in the month. It beat analysts' earnings expectations for the quarter and provided full-year 2020 guidance that was also above consensus estimates. Helping that along was the company's expectation for a notable improvement in its core lithium business in the final stanza of the year. Lithium is a key component input for electric vehicle batteries. So, in some ways, it was a good quarter and investors cheered the news. With multiple positive coronavirus vaccine updates coming out as the month progressed, investors simply stayed in a buying mood.
The only problem is that Albemarle's adjusted earnings came in nearly 30% lower year over year in the third quarter. The full-year projections, meanwhile, suggest that the best-case scenario is for an adjusted earnings decline of 30%. In other words, things are not really going particularly well right now. COVID-19 vaccine news won't likely change that in the near term, either, since it will take months, if not quarters, for a vaccine to be distributed widely enough to materially alter the course of the coronavirus pandemic.
The huge gain in November has priced in a lot of good news at Albemarle that just doesn't look like it's in the cards over the next few months or quarters. Using the top end of management's 2020 guidance range, Albemarle's P/E ratio is currently 32. That's in line with the company's five-year average P/E, but massively higher than the average P/E prior to 2017 and 2018, when lithium stocks became Wall Street darlings. Investors should probably tread carefully here just in case investor sentiment turns broadly negative again.