Could J Cap’s short report create a panic buying opportunity in the Lithium Sector?

Short selling activist J Capital is now domiciled in the US but its roots are in Australia & China with co-founder Tim Murray based in Sydney, their mandate is simple – sell overpriced stocks to benefit from falling prices, it was a tough gig during the years of “free money” but it’s come into its own over recent months. Many investors find their practice immoral but at MM we have no issue with it, they add liquidity and can amplify rapid gains when they’re wrong conversely when they are on the correct side of the ledger buyers should acknowledge their mistake as opposed to blaming short sellers for a stocks demise.

The company has been in the local press over the years following reports on Wisetech (WTC), Nearmap (NEA), Blackmores (BKL), Fortescue (FMG) and Harvey Norman (HVN) with clearly a mixed bag of success. The logistics of short selling may not be understood by all:

• Short sellers borrow stock from long term investors which they sell into the market looking to repurchase later at a lower price to make money.
• The long-term investors charge interest on their stock increasing their returns which in turn adds a cost to the short seller i.e. it’s called the “cost of carry”.

The risks to a fair and orderly market arise if J capital were to help depress a companies share price believing say their technology is flawed making it far harder and more expensive for the aforesaid company to raise money for R&D, expansion etc when in fact for example the company maybe onto a winner Conversely on the positive side of the ledger the same traders have uncovered frauds such as Enron i.e. its undoubtedly a moral balancing act.

On Monday Australian lithium producer lake Resources (LKE)  found itself in J Capitals sights although considering the stocks already fallen over 70% from its 2022 high it’s not a big call plus the companies already carrying the markets 8^th largest short position with 8.25% of the company sold short. The reports timing is far from exciting for MM and considering its success with German lithium business Vulcan Energy Resources it’s almost a reason to consider buying hence today’s report.

We remain neutral LKE after its MD recently resigned and subsequently sold his stock in the business with questions being asked around its proprietary clean extraction technology i.e. we see better risk / reward elsewhere on the ASX for lithium exposure.