If you invest in lithium stocks -- first, I feel your pain.

Since hitting a multi-year high of roughly $85 barely one year ago, the price of lithium has been on a mostly uninterrupted slide ever since, recently bottoming out at just $13.72 per kilogram -- a decline of 84%, according to data from DailyMetalPrice.com.

Lithium mining stocks haven't been hit quite that hard. But they've been hit hard enough, with shares of two of the industry's giants, Sociedad Química y Minera de Chile (NYSE: SQM) (also known as SQM) down 32% through Friday's close for example, and larger Albemarle (ALB -2.06%) suffering even more -- down 37%.

Now the good news is that Albemarle remains the world's biggest miner of lithium by market. The bad news is that this higher profile may mean that when investors panic over the falling price of lithium, and look for something to sell ... Albemarle may be the first name they think of selling.

Is that fair?

That's not fair!

In many respects, it is not fair. Or more to the point, it's not a logical reaction the market is making here, punishing Albemarle stock more than it's punished SQM for the precipitous decline in lithium prices.

Consider the two companies side by side:

Metric

Albemarle

SQM

Trailing 12-month revenue

$9.9 billion

$9.3 billion

Net profit margin

33.6%

31.9%

Annual net profit

$3.3 billion

$3 billion

Free cash flow

$465 million

$461 million

Market capitalization

$17.2 billion

$16.3 billion

Revenue, profit margin, net profit, and free cash flow figures are all TTM. Source: Yahoo! Finance. Free cash flow data provided by S&P Global Market Intelligence.

Despite having more revenue, more profitable revenue, more profits and more free cash flow than SQM, Albemarle stock has been punished more heavily than has SQM for the plunging price of lithium. And yet, for new investors in lithium stocks, that's not necessarily a bad thing.

Is it time to buy Albemarle stock?

It means that any new money you invest in Albemarle, rather than in SQM for example, should have a better chance of growing in the future.

Note that I say "better chance" -- not "guaranteed inevitability." I do have reservations even about investing in this mining stock. On the surface, yes, Albemarle looks like a fantastic value buy at a low 5.2 times trailing earnings -- even cheaper than SQM stock at 5.4 times earnings. On the other hand, though, make sure to notice how much lower both companies' (and if you're considering an investment in Albemarle, then Albemarle's in particular) free cash flow is, relative to reported net profit. For every $1 in net profit Albemarle reports, the company actually generates only about $0.14 in real cash profit.

That's not a good ratio at all.

If you value the stock on free cash flow rather than net income, it means that Albemarle actually costs closer to 37 times annual cash profits, as opposed to accounting profits. The reason for this is mainly because Albemarle has been spending a lot of cash lately on capital expenditures, building out its production capacity to produce lithium that's been falling in price as it increases production. (And this situation will likely get worse. In its most recent earnings release, Albemarle warned that capital spending will actually exceed cash from operations by the end of this year, resulting in negative free cash flow.)

That being said, at some point, Albemarle should have expanded its capacity sufficiently so that it would be able to cut back on capital spending. Prior to 2017, for example, it was rare to see the company spend more than $200 million in a year on capital expenditures (as opposed to the $1.9 billion the company spent on capex over the last 12 months). If and when capex spending begins to slacken, more of the cash the company generates from operations should convert to real free cash flow. At some point, too, lithium prices should climb as rising demand eclipses the world's capacity to supply that demand.

For would-be investors in Albemarle, therefore, I think this is the scenario we should be looking forward to -- the scenario that would enable Albemarle to "crush the market" in 2024 (or 2025, or 2026). As you follow the company going forward, therefore, I'd urge you to focus on two things in particular:

  1. Are there signs of a revival in lithium prices? (Morningstar analysts say there are, predicting that lithium prices will roughly double over the next seven years.)
  2. And is Albemarle planning to cut back on capital spending to permit more of its operating cash flow to turn into free cash flow? (This isn't happening yet, with management saying capital spending is still on the rise.)

Once both those trends align, it will be time to buy Albemarle stock.

Editor's note: An earlier version of this article contained an incorrect P/E for Albemarle stock.