It's never a good sign when short-seller interest in an ASX share is on the rise. Yet this is the situation that is confronting those who own ASX 200 lithium stock Lake Resources N.L. (ASX: LKE) this week.
Each week, my Fool colleague James takes stock of the most shorted shares on the ASX. Last week, Lake Resources shares made the cut of the top ten, with 8% of the company's shares being held in a short position. But on today's list, we revealed that this short interest had risen by a significant 0.7% to 8.7%.
Short selling is a practice that enables an investor (usually a professional or institutional investor) to profit from a share's falling value. The process works by allowing an investor who owns shares to 'loan' the shares out to another investor (the shorter) with a promise of returning them at a later, agreed-upon date.
The shorter then immediately sells the shares and buys them back at the agreed date. If the shares have fallen in value over that time, the shorter makes a profit.
So the fact that Lake Resources is one of ASX's top ten most-shorted shares tells us that a lot of money is being wagered that the Lake Resources share price will fall substantially going forward.
But why the big surge in short-seller interest over the past week?
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Why are short sellers betting against Lake Resources shares?
Well, that's hard to answer. There haven't been any news or announcements out of Lake Resources itself, such as an earnings report or trading update, that might explain this surge in pessimism.
There are a few possible causes we can point to, however. The first is the news that a major international lithium company has just posted an unexpectedly soft earnings report. As my Fool colleague James revealed this morning, Sociedad Quimica y Minera de Chile (NYSE: SQM) released a quarterly update last Friday. This revealed softer profits thanks to a hit in demand resulting from high stockpiles across the battery supply chain.
Perhaps some investors anticipated this and upped their short positions in Lake Resources shares accordingly.
The other factor is Lake Resources' share price. Lake Resources shares have had a tough year, remaining down more than 20% as of today's pricing. However, the company is also up an impressive 45% since late April, when the company was asking just 42 cents a share:
Runs of that size over just a few weeks tend to raise eyebrows. So perhaps investors are betting that Lake Resources shares will come back to earth over the next few weeks and months, and deliver some hefty profits for shorters in the process.
Whatever the reason for Lake Resources' high short-seller interest, it is certainly worth taking note of for any current shareholders.
At the current Lake Resources share price, this ASX 200 lithium stock has a market capitalisation of approximately $860 million.
