The last 12 months or so have been a wild ride for Lake Resource N.L. (ASX: LKE) and those invested in its shares.
After peaking at $2.65 in April 2022, the Lake Resources share price crashed to a low of 54.5 cents in July. It's since recovered just 38% to trade at 75 cents.
Meanwhile, many of its S&P/ASX 200 Index (ASX: XJO) lithium peers have soared into the green.
Shares in Sayona Mining Ltd (ASX: SYA) and Pilbara Minerals Ltd (ASX: PLS), for instance, have gained 85% and 41% respectively since this time last year.
And among the carnage facing its share price, Lake Resources has also found itself a favourite among short sellers. Should that be a red flag for those invested in the lithium share? Let's take a look.
Is a large short interest a red flag for ASX investors?
Short sellers effectively bet against a company's share price. Thus, considering the level of short seller interest in a share can be a means to gauge market sentiment.
That certainly sounds like a red flag for investors 'going long' on the stock (expecting it to gain in the future).
Especially as short-selling proponents – such as Warren Buffett – argue that, among other impacts, short sellers can help sniff out dishonest business practices. The billionaire once said:
The situations in which there have been huge short interests … very often have been later revealed to be frauds or semi-frauds.
Though, short sellers can also make false claims against a company in a bid to cause investors to sell its stock in a panic, in turn reducing its share price.
If that's indeed the case, an investor might be wise to largely ignore short sellers.
Right now, around 7% of Lake Resources shares are being shorted. That places it among the ASX's 10 most shorted stocks, alongside fellow ASX 200 lithium outfits Sayona, Core Lithium Ltd (ASX: CXO), and Liontown Resources Ltd (ASX: LTR).
Fortunately for those interested in Lake Resources shares, there is a relatively simple way to know what one notable short seller dislikes about the share – simply because they've told us.
Lake Resources shares hit by short attacks in 2022
Short seller interest in Lake Resources shares spiked in June last year, just weeks before a scathing attack by activist short seller J Capital dropped, seemingly sending the stock to its lowest price in years.
Since then, J Capital has released a number of reports criticising the company, most recently in December.
Much of its critiques have boiled down to the direct lithium extraction (DLE) technology currently being developed by Lake Resources' partner Lilac Solutions. The technology is crucial to the company's Kachi project's planned production.
Lake Resources has responded to a previous report from the activist short seller, calling its claims "incorrect" and "inaccurate".
