Lithium Americas is a penny stock. I would put an asterisk after that however, because I don't believe it qualifies as your typical penny play for a number of reasons.
- LAC trades on Canada's big board TSX exchange, not the lower profile Venture
- The company recently announced a 50/50 JV with incumbent producer and NYSE listed SQM for their Argentinian project
- NYSE traded LIT, the only Lithium based ETF, has LAC as one of its holdings.
Regardless of those points however, LAC still qualifies as a penny stock by the strictest definitions.
With that being said, there is no hard and fixed rule for what qualifies as a penny stock. For some any stock trading for less than one single dollar qualifies, others say $2, and some go as high as $5. Do note that in US funds LACDF is currently trading under $0.80 cents.
If you're looking to sell LAC short, for all intents and purposes it is a penny stock.
I'm often surprised by the fact that a lot of retail investors really don't understand short selling. Pretty much everyone understands that its a ''bet'' that a stock's price is going to fall, but beyond that many don't understand how it works or how one might profit from it.
A PRIMER ON HOW SHORT SELLING WORKS
It might help to think of something other than stocks. Imagine you have a friend with a really fancy watch, one that is Swiss made and is worth $5,000. Now imagine you find out that this Swiss watch contains a cancer causing element, and that news is expected to be released in another week or two.
How might you profit from this knowledge?
How might you profit from this knowledge?
You could borrow your friend's fancy expensive watch, maybe give him $100 to lend it to you saying you need to impress some people at a conference or something. After borrowing the watch you then go out and sell it immediately, netting $5,000. But of course your friend wants his watch back. When the news comes out about the carcinogenic element you're able to buy it back for say $100.
You just made $4,800 from something you never owned. $5,000 from selling the watch less the $100 you paid to buy it back and the $100 you gave your friend to loan it to you.
Stocks are no different. If you have say 100,000 shares of LAC (or LACDF) sitting in your brokerage account, then those shares could be loaned out to someone to be sold short, just as with the watch in the above example. The individual borrowing your shares will have to pay a fee of course, and with penny stocks it can be hefty, but it can be done.
If the 100,000 shares are sold for $1.00 CDN the short seller profits provided he is able to buy them back at a lower cost. If LAC were to fall to .50 cents, then our short selling bear could take $50,000 out of the $100,000 he got from selling the shares short and buy them back, returning them to the broker they were borrowed from. In this example the short player would have made $50,000 less brokerage and trading fees.
Clear as mud?
Take note though, shorting a stock is exponentially more risky than going long. If you buy 100,000 shares of LAC at $1 per then the most you can lose is $100,000, that's a lot of money certainly, but its nothing compared to the theoretical losses a short seller could incur. While a stock cannot possibly go below $0.00 there is no fixed limit as to how high it could go.
Imagine someone shorting 100,000 shares of CYNK at $1.00 and then being forced to buy it back for $10, $15 or $20....The shorting of 100K shares of CYNK at $1.00 nets $100,000 but if a margin call were to force the short seller to cover at $10, then those shares that netted $100,000 would cost $1,000,000 for a loss of $900,000....at $20 per share those losses double. OUCHIE!!!
Shorts have to be hyper careful, obviously. Bears have a reputation for being incredibly diligent in their research because of these risks. And it is for this reason that I give bears a lot of respect. Facing the potential for losses that, in theory at least, could be limitless....they had better be pretty damn confident in their decisions.
That is why, if I see a stock with 10, 20, 30% or more of its outstanding shares sold short....I take notice. There are stocks with big short interest of course, but typically they're trading much higher than a single Canadian dollar.
SHORT INTEREST IN LITHIUM AMERICAS CLIMBS
LAC is nowhere near even 10% short interest however. In fact its only at 1.14% as of June 30th 2016.
But the raw number is still enough to raise an eyebrow. The number sits at 3,391,624 and again, that is current up to June 30th 2016 as per the site StockWatch. Up to June 15th 2016 the number had been 3,044,216 for an increase of 347,408 shares.
In fact short interest for LAC has been climbing steadily since the company completed the merger with Western Lithium (former symbol WLC) and reverted back to trading under the symbol LAC.
Up to March 31st of this year the number of shares shorted was 769,200 By April 15th it had risen to over 1.7 million, then over 1.9 million as recently as May 31st and now (up to June 30th as noted) it sits at over 3.3 million.
On March 31st LAC was trading for less than 50 cents, by April 15th it had climbed to up around 80 cents. On May 31st the PPS closed at 85 cents and now it sits at $1.01 after trading as high as $1.15 on July 4th 2016.
Obviously short sellers made a bad play. Or did they?
If you're going to short a stock you better have deep pockets, and that goes double for a penny stock because of the higher margin requirements. If you're using a discount broker like say BMO, TD or Quest then you can't even short a penny stock regardless. There are firms that will accommodate those wanting to short penny stocks of course, but you better have a big bankroll.
Just for arguments sake let's assume that those 3.3 million of LAC that have been shorted, let's assume it is one single individual. And again for arguments sake we'll say the average price they were sold at was .75 cents....half way between 50 cents and a buck.
3.3 million shares sold at .75 cents would net the short seller $2,475,000.00....a hefty sum certainly. But our hypothetical bearish friend doesn't get to go out and spend that money, it has to stay in a margin account. And that's not all, to guard against a climbing share price our bearish friend will be required to have extra cash in that margin account, perhaps 100% more. That would mean another $2,475,000.00 on top of what was made from selling the shares.
Our short selling friend now has close to $5,000,000 tied up. And it gets worse. LAC isn't trading for $0.75 now, its at $1.00....which means $3,000,000 to buy them back and at 100% an additional $3,000,000 in the margin account. If the short seller can't come up with the extra million? Too bad so sad, the broker can then use the $5,000,000 in the margin account to buy the shares back.
I'm going to wrap this up, there's probably only one or two people who will even bother to read this all the way to the end anyway.
It is my belief that the short selling LAC has seen, that there's a good chance its being used by parties looking to inject some Fear Uncertainty and Doubt (FUD) into retail shareholders. That or possibly due to Market Maker Broker Dealers (MMs) being surprised by the surge in buying.
If it is MMs, I don't see LAC making a big move until or unless that number declines significantly. If, on the other hand, its accumulators engaging in a little (perfectly legal) manipulation....then hopefully they've accumulated far more than what they're short and perhaps they might be willing to give up the little Wyckoff game, if that is indeed what they're doing.
What? You've never heard of the so called Wyckoff Method? Well then, here's some more reading for you:
Well written, thanks!
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