Investors who hold Pilbara Minerals Ltd (ASX: PLS) shares find themselves in rather a unique position on the Australian stock market.
For one, they are part-owners of the largest lithium stock on the Australian markets. But that's not the only factor that makes Pilbara investors a rather special lot. They also have a part-ownership in the ASX's most short-sold stock.
Every week, my Fool colleague James looks at the ASX's most shorted shares. For months now, Pilbara has found itself close to, or more often at the top of, this list. Just this week, Pilbara once again took out the top spot, with a startling 20.5% of its shares being held in a short position.
Short-selling is a sometimes controversial practice that many institutional or wholesale investors engage in. It involves betting against a company's fortunes in the hope that when the shares fall in value, the shorters can make a profit.
Shorters basically borrow another investor's shares, with the promise to return them at an agreed-upon date, usually with interest. When the shorter receives the borrowed shares, they immediately sell them. If the shares fall in value over the period in between these two dates, the shorter buys the shares back at a lower price, and pockets the difference as a profit.
As such, the investors who hold that fifth of Pilbara's outstanding stock are currently hoping that Pilbara shares will fall further.
Pilbara shares' wild ride attracts short sellers
That is certainly saying something, considering the recent share price history this company has already endured. Pilbara shares are up a rosy 5.7% today (at the time of writing) to $3.15 a share.
But even so, the Pilbara share price remains down by around 20% over 2024 and down over 23% over the past 12 months. Shorters have already had a feast with this stock. Bear in mind that this is after a 33% recovery for Pilbara shares since only 10 September.
This brings us to the question at hand: Should anyone holding Pilbara shares sell out due to this high short-seller interest?
Well, that's an interesting question to delve into. As a principle, I think that you shouldn't take any outside opinions of any of your investments too seriously. You can find almost any opinion on any company you'd like if you look hard enough.
However, saying that, the title of the 'ASX's most shorted share' does arguably carry some additional weight. It does indicate that a large number of professional investors think that there is trouble on the horizon for the company.
From my perspective, that's not a dealbreaker in itself. But it does indicate that you should be rock solid in your investment thesis and have a clear idea of why you're right and the shorters are wrong.
Foolish takeaway
It's worth keeping in mind that these shorters are usually focused on the next 12 months, not the next two to three years and beyond. So if you're a long-term investor, you probably shouldn't be too worried about shorters if they are concerned about something as fickle as the price of lithium.
But it probably does mean that any prospective or current owner of Pilbara Minerals shares should take a second look at the company's financials and make certain that they're comfortable with the state of the business.
