Sayona Mining Ltd (ASX: SYA) shares have a rather awkward feather in their cap this week. No, it's not today's static share price performance, which has seen Sayona remain even at 19.5 cents a share at market close.
Rather, it's Sayona's presence on the list of the most short-sold ASX shares on the market. Every week, my Fool colleague James takes stock of the ASX's most shorted shares. This week, Sayona was number four on the list, with a significant 9.3% of its shares short-sold.
Only Zip Co Ltd (ASX: ZIP), Megaport Ltd (ASX: MP1), and Flight Centre Travel Group Ltd (ASX: FLT) have more of their shares shorted.
What is short selling?
When a company's shares are short-sold, it means that investors are betting against the company's future performance. A short seller borrows shares from another investor and immediately sells them, with the promise of returning them at a later date.
If, after the agreed length of time has passed, the company's shares have fallen in value, then the shorter buys them back at the lower price, returns them to their owner, and pockets the difference. As such, they prosper as the company's shares fall in price.
This practice is a little controversial and is usually only conducted by institutional investors. But it legally occurs nonetheless and gives us valuable insight into what big players in the market are thinking.
So the presence of Sayona shares on this week's most shorted shares list tells us that a significant amount of capital is being wagered on the belief the Sayona share price is in for a rough time going forward.
So those who are 'long' Sayona (have shares that aren't short-sold) might be wondering if, and indeed hoping, these short sellers are wrong.
Let's have a quick look to see if the short case stacks up.
A short seller usually believes a share is overvalued, which is why they bet that its share price will fall.
So let's look at Sayona's most recent full-year results to assess its current valuation.
Are Sayona shares overvalued?
For the 2022 financial year, Sayona reported a total of $108.87 million in revenue and other income.
On the bottom line, that translated into a net profit before tax of $83.69 million. When it comes to an earnings per share (EPS) basis, that works out to be 1.23 cents per share. At the current Sayona share price of 19.7 cents, this gives the company a price-to-earnings (P/E) ratio of 16.01
This valuation might be why short sellers are so keen to have a crack at Sayona.
Most ASX resources shares trade on a P/E ratio far lower than that. For instance, BHP Group Ltd (ASX: BHP), one of the most tightly run resources companies in the world, currently has a P/E ratio of 8.7.
Fortescue Metals Group Limited (ASX: FMG) is trading on 8.04. Rio Tinto Limited (ASX: RIO) is looking a little more expensive but is still on 10.67 right now.
So investors are paying almost twice as much for $1 of earnings with Sayona as they are with BHP. Yet BHP is vastly more mature and established.
Sayona shareholders might point to the company's exposure to forward-facing lithium, rather than 'boring' industrial metals like iron ore. But for Sayona to grow to a point that might justify its current P/E ratio, lithium prices will arguably have to rise and stay high for a very long period of time.
It's likely that the short-sellers believe this won't happen and are thus happy to place bets against its future success.
They might be right. They might be wrong. There's no way of telling just yet though.
