The great thing about being a generalist is that I can learn a lot about a wide range of topics. I am constantly trying to expand my knowledge base and then try to use this knowledge to profitably invest in the stock market. Over the weekend I became somewhat of an "expert" on the cobalt market. Why? Let me tell you.
On August 28, 2007 I posted a blog to my subscribers explaining my reasons for buying OM Group (OMG), a small company that uses cobalt to make a broad range of specialty chemical products used in various applications such as batteries, lubricants, magnetic media, etc. The stock rose 10.8% on Friday on no news that I would have thought could have moved the stock this much. The stock is up 20.3% in the last 3 trading days. Forbes.com had this to say about the recent action.
Being human as the next fellow, I was tempted to say that I foresaw this move when I bought the stock and that this proves that I am some kind of "guru." But also being a fallible as the next guy, I am reminded of my good friend Dan Klionski's oft spoken witticism -- "even a blind pig occasionally finds the acorn." Truth be told, I did not know the stock would move this much this fast.
However, I did know (or at least believed strongly) at the time of purchase that the stock was cheap, that the company has a ton of cash on its balance sheet ($13 per share to be precise) and that it has an aggressive strategy to become less dependent on the fluctuations of cobalt prices -- something I think will lead to a higher valuation for the shares. All of these factors are still in place and the stock is still cheap, in my opinion.
But let's talk a bit about cobalt. I discovered in my studies over the weekend that cobalt is a critical component in making the batteries used in hybrid and electric cars. Both lithium-based and nickel metal hydride batteries need cobalt to operate. ALL automobile manufactures need cobalt to make batteries for ALL of their hybrid vehicles.
I also learned that the Congo is the world's largest producer of cobalt, accounting for roughly 40% of the metal produced. OMG procures its cobalt mostly from the Congo. A US government study indicated that usage of cobalt breaks down like this:
- 50% super alloys used in aircraft gas turbines
- 24% various chemical operations (this is where OMG is strong)
- 18% various other metallic uses
- 9% cemented carbides for cutting and wear resistant applications
I was attracted to OMG in part because the wide range of application for its products. I figured that in a reasonably strong global economy the company would be unlikely to run into any significant demand slowdown problems.
Also in my studies I found this remarkable article that tries to explain the current forces working on the cobalt market. Here is the link:
The bottom line is that a large number of players in the cobalt market appear to be stockpiling the metal in an attempt to meet what could be greater demand in the future. Given the limited number of suppliers out there, I think many investors may be very interested in the sources of this metal, like OMG.
This may be one reason that the hedge fund Third Point recently acquired 2 million shares of OMG. I continue to be a happy holder of the shares and as I mentioned in my original post, I see the stock moving to the $60-65 range over the longer term.
Disclosure: Long OMG