Why Pilbara Minerals shares are a buy for this lithium short seller

This expert thinks Pilbara Minerals is uniquely positioned compared to other ASX lithium shares.

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Pilbara Minerals Ltd (ASX: PLS) shares are down 22% from their all-time high. Undeterred, one practised fund manager selects the heavily shorted company as the pick of the lithium crop.

The Western Australian miner has come under intense pressure since November 2022. At the time, lithium carbonate was fetching around USD$85,000 per tonne. Fast forward 18 months, miners are now confronted with prices that are lucky to be one-fifth of those glory days.

Short sellers have been banking on the lithium downfall to print returns. Not only is Pilbara Minerals among the most shorted ASX-listed companies, it is the most shorted… and has been for a long time now.

Still, a fundie who is familiar with finding short targets believes Pilbara Minerals shares are being misplaced.

Best-of-breed ASX lithium pick

Sage Capital is an investment management firm located in Sydney. The youthful equity manager was formed in 2019 by ex-Tribeca portfolio manager Sean Fenton.

Fenton is no stranger to making money by identifying overvalued equities. For 15 years, Fenton guided Tribeca's Alpha Plus fund, chasing S&P/ASX 200 Index (ASX: XJO) outperformance by implementing a mix of short selling and going long (buying) listed Aussie companies.

While Fenton switched out Tribeca for his firm, the approach remains the same.

The astute fund manager describes the strategy as one that's grounded in exploiting behavioural biases, saying:

People panic when things start going wrong and get overconfident when things go well. All those different biases can lead to poor investment decisions. A lot of what we do is about exploiting those poor decisions made by people and trying to remove them from our own processes.

A prime example of this is Fenton's backing of Pilbara Minerals shares. In a case of what might be throwing the baby out with the bathwater, the fundie thinks the Pilgangoora mine operator is cut from a different cloth to its lithium peers.

Fenton partly favours the $12.6 billion lithium company for its robust balance sheet. As of 31 December 2023, Pilbara Minerals held $2.14 billion in cash and cash equivalents, towering over its $452.5 million worth of debt — a net cash position of $1.6 billion.

The positive view, however, does not extend to other ASX lithium shares. Sage Capital has shorted others in the space, including Lake Resources N.L (ASX: LKE), Core Lithium Ltd (ASX: CXO), and Sayona Mining Ltd (ASX: SYA).

Contrarian take on Pilbara Minerals shares

Apparently, Sean Fenton and his team don't mind being the odd ones out.

As noted by my colleague, James Mickleboro, Pilbara Minerals is still the most shorted ASX share heading into the week. Nearly 22% of the company's shares are sold short — twice the short interest attracted by Liontown Resources Ltd (ASX: LTR), a pre-production lithium name.

Likewise, the Pilbara Minerals share price has underperformed the ASX 200 over the past year, as shown above.

Yet, Fenton believes shorters are barking up the wrong tree. He believes short sellers are piling on Pilbara Minerals because of its premium price tag. However, he thinks the premium is warranted, calling it a 'low-risk way to play' lithium demand.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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