Lithium companies have emerged as a target for ASX short sellers early in the new year, with half of the market's 10 most shorted stocks being lithium explorers or producers. This comes amid falling prices for the crucial battery metal and growing concerns around the sustainability of such companies.
Pilbara Minerals has seen short-selling levels surge to 20.75%, reflecting the broader lithium market sentiment on declining lithium prices. Similarly, Syrah Resources and Core Lithium have each experienced significant short interest, with Core Lithium recently announcing the suspension of mining operations.
Shorts face headwinds
Yet the strategy of short selling — where investors borrow shares to sell them in anticipation of buying them back at a lower price, essentially betting that companies’ share prices will fall — faces various headwinds.
Experts warn that short selling in the current market could be challenging, as it is heavily influenced by macroeconomic factors and exhibiting early signs of a bull market.
Doug Tynan, chief investment officer at GCQ Funds Management, which achieved a 52.5% net return last year, highlights the complexities of short selling in the current climate. He said, “It’s not easy right now for anyone trying to short sell as the market is macro-driven and we are in the early stages of a bull market. It feels like 2009 and 2010 when so many people were positioned for a correction which never came.”
GCQ maintains a cautious approach with only 2-3% of its portfolio dedicated to short positions and Tynan emphasises the importance of investing in high-quality businesses with strong growth potential and pricing power.
Ray David of Blackwattle Investment Partners notes their focus on both long and short positions in the lithium market, targeting low-cost, long-reserve producers for long positions, and high-cost, low-reserve producers for short positions.
David also identifies potential short opportunities in "expensive defensive", like certain supermarkets, which may be facing rising operational costs and weaker consumer spending.
Better returns going long
Despite the emphasis on short selling, both Tynan and David agree that long positions generally yield better returns.
This sentiment is echoed by other local investors who point out the challenges posed by increasing retail shareholder participation and a more resilient local economy, especially for short positions in local retailers.
However, they also note that 'concept stocks' with low revenue and high valuations, such as Weebit Nano, may present opportunities for short sellers over time.