Several Biotech Stocks Indicating A Macro Short Strategy | Seeking …
Summary
OvaScience, Sarpeta Therapeutics, Ziopharm Oncology and Keryx Biopharmaceuticals all have a short interest above 20%.
These small cap biotech companies provide attractive characteristics for fundamental weakness through liquidity needs, no revenue and a higher fail rate.
Given these common variables, there is strong indication that a large Marco short strategy has been put in place.
This large short position provides opportunities for contrarian investors.
Several Small Biotech Companies Have a Substantial Short Interest
Recently there has been a substantial increase in short interest for OvaScience (NASDAQ:OVAS), Sarpeta Therapeutics (NASDAQ:SRPT), ZIOPHARM Oncology (NASDAQ:ZIOP) and Keryx Biopharmaceuticals (NASDAQ:KERX). All of these companies have a short interest of over 30%. While these companies aim to treat very different problems, they do have many things in common.
Market Capitalization
As of today, all of these companies would be considered a small cap company due to their relatively small market capitalization.
OvaScience: $770 Million
Sarpeta Therapeutics: $1.2 Billion
ZIOPHARM Oncology: $1.4 Billion
Keryx Biopharmaceuticals: $1.01 Billion
What seems to have occurred is that there is a substantial increase in short interest after these companies’ market capitalizations reach over $1 Billion. There is however another factor that must take place before the short interest increases, and this is a secondary offering.
Secondary Offering: Short Interest Before and After
The above table shows the short interest before and after the most recent secondary offerings for these companies. As you can see there is a strong correlation between the offering event and an increase in short interest. The reason secondary offerings are an attractive signal for institutional shorts comes from game theory. If insiders feel that the stock is overvalued, then they will sell the stock on the open market as it is now a less expensive form of financing. This screams “short me” to institutional short sellers.
No Revenue
All of these companies are considered “development stage companies”, meaning they don’t have revenue yet and are essentially venture capital opportunities. Given that these companies don’t have any significant revenue streams, their only source of cash is equity offerings. Additionally, development stage companies in general have a very high failure rate. This provides a higher probability of success for a short position. Given managements knowledge of the company and game theory, institutional shorts see equity offerings as the best risk adjusted time to short these companies.
Why Shorts Love Biotech Right Now
Development stage biotech companies pose a very high risk to investors. If a Biotech company is just starting its phase 1 clinical trials their products have a 60% probability of failure. In addition to this probability of failure, if a company is worth over $1 billion and has no revenue, this reminds many investors of the tech bubble back in 2000 and therefore provides a historical precedent for a strong short position. Adding further fuel to the short fire right now is substantiated fears of a bubble in the Chinese stock market and a possibility of a Greek exit of the European Union. With these three big macro scares in the financial markets, stocks with no operating cash flow and a relatively high probability of failure give institutional shorts a good reason to short these companies.
Potential Opportunity For Long Term Investors
When there are massive short positions, a stocks share structure is artifically inflated and this can cause a short term price depreciation. This gives contrarian investors the perfect time to look for the best stock picks. Of these companies, the best opportunity is in OvaScience. This stock has been beaten down worse than all of the others because of bad information and a product launch strategy that does not fit the normal biotech mold. This has lead to a massive short buildup that is about to face some very significant catalysts in the near future. Recently, JP Morgan came out with a price target of $40 per share and the average price target is $60 a share. While OvaScience is clearly undervalued, there is definitely the potential for other alpha opportunities in the other stocks. If contrarians are looking for great opportunities, these companies definitely deserve a look.
Source:
Several Biotech Stocks Indicating A Macro Short Strategy
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OVAS over the next 72 hours. (More…)I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The short interest data was compiled from gurufocus.com entirely for the long term historical data and to provide the best apples to apples comparison.
Continue reading here –
Several Biotech Stocks Indicating A Macro Short Strategy | Seeking …
