Why This Obscure Stock Nearly Quadrupled Overnight

Love him or hate him, or somewhere in between, there’s no arguing that Elon Musk, the 2021 Time Man of the Year, keeps things interesting.

From puffing on a marijuana joint on a podcast, to posting controversial Tweets, to picking a fight with Putin, the orthodox CEO of Tesla and SpaceX seems to always be in the news one way or another. In fact, as this article went to press, he has reportedly reached a deal to buy Twitter (NYSE: TWTR) for $44 billion.

And recently, Musk put traders on alert when he commented on Twitter that his electric vehicle making company Tesla (NSDQ: TSLA) may have to get involved in the lithium mining business because the cost of lithium has become so expensive.

The idea is that if Tesla can better control costs if it produces its own lithium, a critical mineral for use in Tesla’s batteries. Due to expected strong demand growth and inadequate investment, lithium demand likely is expected to significantly outstrip supply in the years ahead, pointing to continued inflated prices.

Igniting Excitement

To be fair, what Musk says on Twitter doesn’t always come true. However, Tesla is known to have hired a geologist away from global mining giant Rio Tinto (NYSE: RIO), which does suggest that there is some legitimacy behind the idea of Tesla and in-house lithium production.

And of course, people got excited about whether this means Tesla will make a big investment in a lithium producer or even buy one outright. After all, it’s far easier to purchase existing assets than to start from scratch.

Additionally, this isn’t the first time Tesla has been interested in buying lithium assets. It’s believed that it was close to buying a miner in 2020, but the deal fell through.

Different Impacts on Lithium Companies

The shares of big-cap lithium producer Albemarle (NYSE: ALB) hardly budged. This is because the market cap of the company is about $24 billion, and the company produces other products as well, such as specialty chemicals. It wouldn’t make much sense for Tesla to spend, say, $30 billion to buy Albemarle. The market knows this.

On the other hand, on April 13, a few days after the Musk tweet, the trading volume on Lithium Corp. (OTC: LTUM) surged to 23 million shares and the price went from $0.287 to $0.359. The 25% gain greatly understates how much the stock actually jumped. During intraday trading, before it came back down to earth when traders realized something was amiss, the price reached as high as $1.09, a 279.8% increase from the previous day’s closing price! That’s almost a quadruple!

What lit a fire under LTUM was the circulation on social media of what turned out to be a fake press release that Tesla was buying Lithium Corp. The market reacted strongly because it was believable that Tesla may buy Lithium Corp.

Since Lithium is a small junior miner (not yet producing) with assets in Nevada and a market cap south of $50 million, it wasn’t going to break the bank for Tesla to take it over. It is a far likelier takeover candidate than the aforementioned Albemarle.

Fake News Could Become Real News

Indeed, even though there is currently no deal between the two companies, as of this writing, LTUM is still priced almost 40% higher than its April 12 closing price, so the market still thinks there’s a chance something could happen. In fact, while the Lithium’s CEO Tom Lewis said the press release was fake news, he invited Musk to “say hello,” so he is open to offers.

The LTUM example shows how a potential takeover can send a stock to the moon in a blink of an eye. As mentioned above, even though the news turned out to be false, the stock is still much higher than it was before. This is why some investors speculate on potential takeover candidates as a strategy.

Of course, no one can correctly predict takeovers consistently, but by identifying small companies with attractive assets, an investor can increase the chances of hitting the bullseye. Ideally, you want to invest in companies that have positive attributes besides the takeover angle. This way, even if there is no takeover, you could still make money on the investment.

Editor’s Note: In this volatile and risky market, where can you still find solid growth opportunities? We can sum it up with a single word: takeovers. You might have heard them referred to as buyouts, mergers, or acquisitions. But no matter what you call them, when a takeover is triggered, the profits that spill out have life-changing potential.

In this era of war, inflation and pandemic, corporate consolidation is the name of the game. Even the whisper of a “mega-merger” can hand investors enormous returns. Our colleague Nathan Slaughter, chief investment strategist of Takeover Trader, just pinpointed a potential takeover deal that could dwarf them all.

Want to get in on Nathan’s next big trade? Click here for details.