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Wall Street's Latest Short: Lithium Stocks

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    One of the hottest investments of 2017 is now a big short.
    Investors have reaped gains this year from short bets on companies that produce lithium—an obscure commodity used in the batteries that power electric vehicles and smartphones.
    Lithium soared last year on expectations that growth in demand would lead to a shortage in supply. But so far in 2018, stocks of lithium companies have tumbled after Morgan Stanley raised concerns that producers will ramp up output too quickly.
    Investors who had short bets have been rewarded by the slump. Short bets against eight of the most-actively traded lithium companies have already generated more than $550 million in profits this year, according to an analysis by financial technology and analytics firm S3 Partners based on stock prices through Monday.
    “It’s been a home run trade—there’s no question about it,” said Chris Berry, founder of House Mountain Partners LLC, a New York-based adviser to battery-metals companies and investors.
    Bullish projections for consumption made lithium and cobalt two of the market’s darlings last year, but sentiment quickly turned after Morgan Stanley called for oversupply in lithium in February. Now, analysts say prices of materials for batteries have plunged in China, which dominates the battery market. Worries have intensified that changes to China’s electric-vehicle subsidy policies will lead to lower demand.
    The Global X Lithium and Battery Tech ETF—a popular ETF that allows investors to bet on the industry—is down 18% so far in 2018. That’s a reversal from its 59% rally last year.
    Some of the largest producers in the world including Chilean firm Sociedad Quimica Y Minera De Chile S.A. and U.S. firm Albemarle Corp. have tumbled nearly 25%. Small lithium companies have fared even worse--in some cases shedding up to 70%.
    Some companies and investors remain bullish on the lithium market. SoftBank Group Corp. and Tesla Inc. are among the large technology and auto companies that have recently done deals to secure lithium supply.
    But that hasn’t dented the bearish outlook of some investors and traders.
    They’re betting losses in the lithium market will continue. Short positions make up more than 18% of outstanding shares of Albemarle and Australian firms Galaxy Resources Ltd. and Orocobre Ltd., according to data from IHS Markit. That’s up from an average of 7.5% at the start of the year.
    “There’s a disconnect there for sure, and the question now is, ‘What changes the sentiment?’” Mr. Berry said.
    Are you betting against battery metals? Let
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