It seems the markets (or at least some deep-pocketed investors) have it in for Core Lithium Ltd (ASX: CXO) shares right now.
Each week, my Fool colleague James takes a look at which ASX shares are appearing on the ASX's most short-sold shares list. Core Lithium shares are a regular guest here. But not only is Core Lithium one of the ASX's most shorted shares right now, but the short interest in this ASX 200 lithium stock has also been dramatically increasing for weeks on end.
Back on 10 July, we reported that Core was the ASX's third-most shorted share on the market, with 9.45% of its outstanding shares being held in a short position. By this Monday (17 July), the company had vaulted to second place, with a much larger 10% of its shares short-sold.
So why are investors ramping up their bets against Core Lithium shares?
What is short selling?
Short selling is the process that (usually) large and institutional investor use to 'bet against' the fortunes of an ASX share. It involves the short seller borrowing shares from another investor, with the promise to return them at a set date in the future. The shorter then sells the shares and buys them back just before this return date.
If those shares fall in value during this period, then the shorter makes a profit. However, if the shares rise in value, the shorter takes a loss.
So the fact this company is seeing rising short interest means that more capital is being bet that its shares will fall in value in the next few months.
Of course, short sellers have already done quite well with the Core Lithium share price. The company has lost just over 8% of its value in 2023 so far and remains down over the past 12 months as well. Core Lithium is also down a meaty 44% or so from the all-time highs of around $1.70 a share that we saw back in late 2022.
Why are investors betting against Core Lithium shares?
It's not immediately clear why investors are increasingly anticipating a drop in the Core Lithium share price going forward. One possible explanation is concerns over the slowdown of growth we have seen in the Chinese market.
China is a major importer of lithium and possesses much of the world's raw lithium processing capacity. If China's economy continues to slow, it could put downward pressure on lithium prices, and thus hurt Core Lithium's profits.
Back in May, my Fool colleague Bernd looked at several ASX brokers' views on Core Lithium shares. It was something of a mixed bag. Broker Citi shared short seller pessimism over Core Lithium, giving the company a share price target of just 75 cents a share. This broker cited valuation concerns as its chief reason for this bearish price target.
So perhaps the short sellers are taking their cues from Citi.
But this was certainly not a unanimous view.
Citi's fellow ASX broker Macquarie gave Core Lithium shares an overweight rating in May, along with a share price target of $1.30. And another ASX expert in Shaw and Partners portfolio manager James Gerrish called Core Lithium shares a buy, predicting that FY2024 will be "the year where earnings really start to ramp up".
Gerrish said, "We like [Core Lithium] and believe it will trade higher from here."
So someone will be right here, and someone wrong. Only time will tell if it's the Core lithium bulls or the short sellers.
