Short interest in Core Lithium Ltd (ASX: CXO) shares is at a near all-time high this month, coming in at more than 10% at last count.
Interestingly, it comes as the company passes notable risk-reducing milestones. It officially kicked off spodumene concentrate production last month and realised its maiden direct shipping ore (DSO) sale – worth around $20 million – in January.
Still, short sellers appear to remain convinced it's overvalued. Thus, they're effectively betting against the stock.
The Core Lithium share price is trading at 87.75 cents at the time of writing. That leaves the company with a market capitalisation of around $1.6 billion.
So, should investors be worried about the growing short interest in Core Lithium shares? Let's break down why the lithium stock and many of its peers might appear attractive to short sellers.
Why might short sellers be drawn to ASX 200 lithium stocks?
Short sellers appear increasingly bearish on the Core Lithium share price. And that might be due to concerns about the battery-making metals' future value.
As a result of the burgeoning demand for lithium in recent years, many players in the space are still working to reach production. Thus, most remain unprofitable, with few exceptions such as Pilbara Minerals Ltd (ASX: PLS) and Allkem Ltd (ASX: AKE).
That means the market has to find another way to value most ASX lithium shares – including Core Lithium. Often, it does so by estimating their future earnings.
Lithium producers' earnings are normally tied to the price of lithium. Thus, experts typically use the law of supply and demand to predict where the price of lithium might go from here. Though, even leading brokers often struggle to accurately forecast lithium prices.
If short sellers believe the market is overestimating the battery-making material's future worth – and therefore, producers' future earnings – they'll likely move to short lithium stocks.
Meanwhile, as Totus Capital portfolio manager Ben McGarry points out, courtesy of The Age, the valuations of some lithium stocks have likely been bolstered by their inclusion in the likes of the S&P/ASX 200 Index (ASX: XJO).
That has forced index funds to buy ASX 200 lithium shares despite their situations. McGarry said:
So, from an outsider's or short seller's point of view, you're looking at a company that has got no real business and is priced as if everything is going to work out best for the long term.
Is rising short interest in Core Lithium shares a red flag?
Let's get back to the question at hand: Should rising short interest in Core Lithium shares deter investors?
Personally, I don't think a jump in shorting should discourage an otherwise entirely bullish investor.
However, I do think one would be wise to take the time to consider why an ASX share might be getting shorted before buying. There could be an underlying reason that hasn't yet surfaced.
Short sellers' interest in Core Lithium might also be an indication of sliding market sentiment. That has the potential to weigh on a company's share price.
