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SQM and GameStop have been highlighted as Zacks Bull and Bear of the Day

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·15 min read
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For Immediate Release

Chicago, IL – December 15, 2021 – Zacks Equity Research shares SQM SQM as the Bull of the Day, and GameStop GME as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Harley-Davidson HOG, Lion Electric LEV, and Charging Point CHPT.

Here is a synopsis of all five stocks:

Bull of the Day:

Demand for rechargeable batteries is soaring as we enter the digital renaissance of the Roaring 20s, with the pandemic having pulled forward digital adaptation by 10 years in a matter of 10 months. Lithium is the key battery ingredient fueling the electric vehicle (EV) revolution. The global economy's boundless penchant for advancing technologies will drive an insatiable appetite for lithium's power harnessing abilities.

The world's second-largest lithium producer (19% market share), SQM, is a Chilean conglomerate that has become a global authority in battery materials and has leading operations in specialty plant nutrition and several other 'sustainability-focused' minerals. As the price of lithium swells to record levels, analysts are getting increasingly bullish on SQM's outlook, pushing up EPS estimates across the board and propelling the stock into a Zacks Rank #1 (Strong Buy).

According to Benchmark Mineral Intelligence, the leading price reporting agency (PRA) for EV materials (accounting for over 90% of global transaction data), lithium prices have soared 240% year-to-date, reaching a record high, and it looks like this moon-bound trajectory is only going to continue.

The supply & demand imbalance for regardable batteries is expected to significantly deplete lithium sources in the coming years, and technology producers are racing to secure this diminishing lucrative commodity. Lithium is not as rare a material on Earth as its current price level would suggest, but the lithium glut in 2019 forced a shortage of new ventures in this niche mining sector.

Strategic Investments

SQM has been investing in strategic projects in Chile, which holds the largest lithium reserves, and Australia, standing second to Chile in reserves but first in production by a mile. Its Chilean projects are anticipated to grow its lithium carbonite and hydroxide production by 50% & 40%, respectively, by mid-2022, while management estimates its joint venture in Australia will nearly double its lithium hydroxide production by 2024. Below is an investment breakdown from the company's latest investor relations presentation.

Lithium hydroxide is the preferred lithium compound due to its lower decomposition temperatures, allowing producers to make their rechargeable batteries more efficient and longer-lasting. It's the most suitable lithium source for EVs because it provides the range and durability these next-gen automakers are looking for.

SQM entered into an 8-year contract with LG Energy Solutions (a subsidiary of LG Chem) at the start of 2021, solidifying LG as this lithium producer's largest customer throughout the Roaring 20s. LG Energy is the battery supplier for EV startups like Lucid and established automotive conglomerates like Stellantis looking to charge into this rapidly growing space head first.

SQM will have no problem finding eager buyers (assuming its lithium production exceeds its LG agreement) in the years to come.

EV Revolution

Electric vehicle companies are popping up left and right with euphoric investors pouring $10s of billions into this nascent industry. There is now a race among EV giants like Tesla, Rivian, Lucid and countless other players to secure lithium as its supply outlook dwindles in the face of boundless demand for next-generation autos.

Volkswagen recently announced 3 strategic partnerships with Vulcan Energy, Umicore, and 24M Technologies, to guarantee battery supplies for the coming years. Tesla managed to secure a lithium supply contract with Ganfeng Lithium, which is currently the leading global producer of lithium hydroxide and lithium metals (highest quality battery material). Still, SQM is hot on Ganfeng's tail once its latest growth ventures begin paying dividends.

The Setup

SQM has fallen into bear territory (20%+ off recent highs) in less than a month of trading, as the latest Omicron-variant coupled with global monetary fears in the face of persistent inflation compresses growth-focused public equities. SQM is now coming down to its 50-day moving average of around $53 a share, which should provide some support. If the stock breaks that, we have another fib-derived support level around $50.70, which appears to be quite robust.

SQM is trading a 17.7x forward P/E, which is sizably below any of its peers, and even the S&P 500 for that matter, despite earnings appreciation expectation of 90% this year and another 88% in 2022. When you adjust the P/E for growth (aka PEG), it comes out to 0.42x, an extreme discount considering that 1x is generally the standard of equitability with this valuation multiple.

Final Thoughts

Every angle I look at this stock, it's a buy, and the recent valuation compression has created an excellent entry price for us to get in on the already booming lithium rally at a discount.

SQM has a broad spectrum of profit-driving segments on top of its lithium production (30% gross profit), which include specialty and nutrition (30% GP), iodine & derivatives (27%), potassium (9%), and industrial chemicals (4%). Each of these segments saw sizable year-over-year growth between 20% and 94% (46% overall) this past quarter in the face of inflationary pressures and supply chain bottlenecks, as the company unveils its largest quarterly revenues in nearly a decade.

SQM is significantly ramping up lithium production to meet skyrocketing demand. Prices for this now precious commodity are soaring, which I expect its share price will soon reflect. I am looking at a Fibonacci-derived price target north of $67 a share (a 25% upside).

Bear of the Day:

GameStop, the meme stock of the year, failed to unveil the systemic restructuring plans that overzealous traders & investors were hoping for in its latest quarterly report, which drove more bearish calls in the stock, pushing GME into a Zacks Rank #5 (Strong Sell)

The r/WallStreetBets Revolution

The rise of r/WallStreetBets (WSB) and their "Occupy Wall Street" mentality have proven an unprecedented ability to take down short-selling hedge funds with nothing more than a handful of memes. The groupthink-powered market-moving force that WSB has demonstrated to the market has instilled fear in short-sellers everywhere.

WSB catalyzed a paradigm shift in public equities at the beginning of 2021 when this fragmented options-juiced message board managed to rally millions of nostalgia-ridden freshman traders into GameStop in a short-squeeze for the history books.

r/WallStreetBets and the GameStop Saga proved that retail investors are no longer just the little guys and should be taken as seriously as any hedge fund.

GameStop, an antiquated brick-and-mortar video-game retailer on the edge of bankruptcy, skyrocketed 2,700% in January of 2021, from $17.25 a share on the first trading day of the year to an intraday high of $483 on January 28th. WSB traders started getting 'bullish' about their childhood Eden when activist investor and founder of Chewy, Ryan Cohen, decided to take on an active role in the company's "restructuring" (still yet to be seen).

This extraordinary price action was driven by a combination of short-term call options from WSB traders, which generated a leveraged upside on GME as market makers (in which most of these contracts originate) were obligated to buy more shares to hedge their delta-equivalent positions as the stock soared (gamma-squeeze), while short-sellers were forced to buy back their shorted stock at a much higher price to avoid losing more than they could afford (short-squeeze).

Individual investors have never been provided with this level of accessibility to options, a financial derivative previously reserved for "knowledgeable" investors. This high-risk tool has been utilized by freshman traders who have seen many more casualties than winning lottery tickets. Nevertheless, I see the GameStop Saga as an excellent learning experience for freshman and veteran traders alike.

However, GME has since turned into a gambling tool for momentum traders rather than a fundamentally driven stock.

Final Thoughts

There is nothing fundamental backing GME's over $11 billion valuation, with the company's quarterly losses only seeming to accelerate each quarter as its antiquated business model fails to adapt. GameStop managed to take advantage of its rich stock price by raising capital in a secondary equity offering. As of now, this additional funding is just burning a hole in its pocket.

The company hemorrhaged over $300 in cash flows this past quarter. If this type of unexplained spending continues, it's only a matter of quarters before GME will be looking for bankruptcy protection.

Additional content:

Harley-Davidson's (HOG) LiveWire to Go Public Amid EV Frenzy

Electric vehicles (EVs) are the future of the automobile industry. With green vehicles getting mainstream, many EV startups are going public. Legacy automakers are also revving up their electrification strides. Enterprises are capitalizing on the EV madness and seeing this as an opportunistic time to go public, as investors hunt for “green” stocks.

U.S. iconic motorcycle maker Harley-Davidson is the latest company attempting to cash in on the increasing investors’ appetite for EV makers with its decision to take its e-bike unit LiveWire public. Harley-Davidson grabbed eyeballs with its announcement to spin off its electric Livewire unit into a public traded company via a SPAC merger.

Before delving into the transaction details and rationale, let's take a look at how special purpose acquisition companies (SPACs), often dubbed as blank-check companies, have disrupted the traditional IPO market and become the hot ticket for firms to go public.

EV SPAC Boom: LiveWire The Latest Aspirant

Merger with SPACs has become the most popular course of action for an EV IPO of late. SPACs are flourishing in the EV market, helping startups to avoid the complexity and strenuous paperwork associated with the traditional IPO.

Various EV companies chose to go public last year via reverse mergers with SPACs. The trend continued this year with companies like Lion Electric and Charging Point, among others, which debuted on markets this year the SPAC way.

EV charging stalwart ChargePoint started trading on the NYSE effective Mar 1, following the completion of its acquisition with Switchback Energy Acquisition Corporation. CHPT has more than 150,000 charging ports and a 70%+ market share.The fleet management solution, AC and DC fast charging solutions, balance charging costs with operational readiness for fleets of all sizes make ChargePoint one of the best choices for efficient and rapid electrification of any fleet.

Headquartered in Montreal, Lion Electric is a manufacturer of all-electric medium and heavy-duty urban vehicles. The company went public on May 7 via a merger with Northern Genesis Acquisition Corp. Lion Electric’s order book of more than $500 million positions it well to carve out a strong share in the growing electric bus market. LEV is on track to launch eight vehicles by 2022-end, which is set to boost prospects further.

California-based Proterra made its NASDAQ debut on Jun 15 through a merger with ArcLight Clean Transition Corp. PTRA is currently suffering from losses but is actively focusing on generating positive FCF in the next few years. For first-half 2021, Proterra generated revenues of $113 million, up from $95.2 million in the corresponding period in 2020. The long-term battery-cell supply deal with LG Energy Solutions augurs well for PTRA.

Although SPAC deals have been a popular way for EV makers to fast-track themselves in the U.S. auto market, they have primarily been the preferred choice for startups rather than units of traditional auto biggies. But in major news yesterday, Harley-Davidson’s LiveWire unit is set to merge with AEA-Bridges Impact Corp. (“ABIC”) in a deal valuing the combined entity at $1.77 billion. With that, LiveWire will become the first publicly traded e-bike company in the United States.

Transaction Highlights

The deal will be funded by $400 million in cash held by ABIC, and $100 million investment each by HOG and Taiwan-based scooter manufacturer KYMCO.Subject to satisfactory closing conditions and approval of ABIC shareholders, the deal is scheduled for closure in the first half of 2022. Upon closure, LiveWire will trade on the NYSE under the symbol ”LVW.”

The combined entity is expected to have an enterprise value of $1.77 billion and a post-money equity value of $2.31 billion at closing. Harley-Davidson will own a 74% stake in the new company. ABIC’s shareholders will own around 17%, and ABIC’s founders and KYMCO will hold roughly 4% each.

Being LiveWire’s majority shareholder, Harley-Davidson will continue to consolidate LiveWire's operational results for GAAP financial reporting purposes. LiveWire will be reported as a separate segment within HOG’s financials with GAAP disclosures.

Jochen Zeitz, CEO of Harley-Davidson, will be the chairman of the newly formed company. Zeitz will serve as acting CEO of LiveWire for up to two years following the completion of the transaction. Ryan Morrissey will take the position of the president of LiveWire.

Rationale Behind the Deal

We know that Harley-Davidson has been battling challenging demographic trends over the past few years, which have led to a decline in sales volumes. In sync with long-term growth objectives to streamline product portfolio,Harley-Davidson has deepened its focus on motorcycle models and technologies that better align with market trends.

HOG’s ”Hardwire” strategy aims at long-term profitability and growth through refreshed product offerings, with electrification being at the heart of the plan. In a bid to regain its lost market share, Harley-Davidson launched a dedicated EV division, LiveWire earlier this year amid the soaring popularity of green vehicles.

Now by taking its e-motorcycle unit public via a SPAC deal, LiveWire will reap net proceeds of about $545 million, which would help speed up its go-to-market model, investments in new product offerings, as well as bolster manufacturing and distribution capabilities.

The deal would also accelerate expansion in emerging markets where e-bikes are popular. For instance, the partnership with KYMCO, which is investing $100 million in LiveWire, will help in its expansion in the Asian markets. HOG acknowledges Kymco as a “strategic partner” that will aid in the manufacture and distribution of LiveWire’s e-bikes.

LiveWire’s Electric Ambitions

With significant investment and support from its strategic partners including HOG and KYMCO, the deal will enable LiveWire to carve its own brand identity that is distinct from its parent company and revolutionize the electric motorcycle industry.

Harley-Davidson launched the LiveWire One (the first model from the LiveWire unit) this summer. LiveWire will also include STACYC, the all-electric balance bikes for kids. The unit has an attractive pipeline of new products with breakthrough technology and features, with a clear roadmap for long-term profitability.

LiveWire targets to sell more than 100,000 e-bikes in 2026, up from 387 this year, resulting in $1.8 billion in revenues. The EBITDA margin is expected to be 6.1% by 2026, with the long-term target being 15-20%. Per HOG’s latest presentation, the company envisions electric motorcycles to make up 10% of the North American market by 2026, 13% of the European market and 45% of the Chinese market.

Buy HOG Now

Harley-Davidson’s strategic plans to optimize product portfolio and expand customer base augurs well. The motorcycle giant is indeed going the extra mile to rebrand itself. The firm’s decision to list its e-bike unit in a SPAC deal will further unlock fresh growth opportunities.

Considering the tailwinds, HOG is viewed as an attractive bet, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

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