Today I took profits in the Chilean mining company, Sociedad Quimica Y Minera de Chile (SQM), selling 40% of the EIS portfolio’s holdings.  It remains one of the five largest holdings in the portfolio and I have the highest respect for the company.  But the price had appreciated more than 300% since my first purchase just last February, the chart looks like a fully grown hockey stick, and it is now selling at over 50 times running earnings.

I bought SQM initially as an alternative energy play.  Lithium is only 15% of the its business but SQM is the largest lithium supplier in the world and lithium is a central component of the lithium-ion battery that will power the next generation of hybrid-electric vehicles which will be coming to market in less than two years.  Such vehicles represent the future direction of the automotive world.  There will be many millions of them sold between 2010 and 2015. I expect SQM’s lithium business to be a much larger part of the company’s sales and its identity in a few years.

The largest part of SQM’s business now is fertilizer chemicals, perhaps the hottest part of the stock market this year.  That is a wonderful business given the pressure on farmers worldwide to produce more food.  Another important part of SQM’s business is iodine which, interestingly, is also potentially an alternative energy play since iodine is mixed into the liquid that is heated to make steam in some concentrating solar thermal systems.   Concentrating thermal solar is my candidate for the best alternative energy solution long term, so I think this part of SQM’s business also has very high growth potential.

It should be clear from the above that SQM is one of the best positioned companies on the planet in my opinion.  I may well live to regret the sales I made today.  On the other hand, the position had become overly large relative to the portfolio.  In addition it has been publicly hyped by some well known analysts which, along with the stock’s nearly vertical chart, often points to short term weakness in a stock.  Finally, there is evidence that the general condition of the stock market as a whole is weak and getting weaker.  Companies like SQM that are selling on multiples of earnings that are years down the road and that have risen rapidly often are hit the worst during a severe market correction, which may be in the process of happening. 

In sum, selling a great stock like SQM is a difficult decision.  I hope to have an opportunity to buy it back at a lower price, but I recognize the risk that may not happen.