Biotech stocks have been burning short sellers for the last 12 months
Subscribers to Chart of the Week received this commentary on Sunday, September 8.
One of the most popular and utilized technical indicators for contrarian investors is short interest, one of the three tiers of Schaeffers’ Expectational Analysis®. Short interest and squeezes are so important to what we do that Senior Quantitative Analyst Rocky White has compiles a bi-weekly short squeeze screen that helps identify outlier technical setups.
Using strict liquidity data to limit the total number of stocks pulled, White calculates from the return for the shorts by going over the past year of short interest reports to find when the shorts were added. Then, using the average price over the prior two weeks, he estimates the number of shorts added at that average price. A weighted average by increase in shares sold short was used to find the average price shorts are currently sitting at. Lastly, White checks the return the shorts are at. That is, where a bunch of short sellers jumped on board but then the stock kept going up. Now these new short sellers are losing a lot of money and could look to capitulate and cover their short positions soon, which would drive the stock higher.
With that in mind, White’s latest table is worth a closer look.
Every list often features a slew of biotech stocks, the sector sporting more appearances than any other. In fact, no other sector appears more than once in the table above. Biotech’s are easy targets for short sellers because of their volatility, penchant to make outsized moves, and price performance that’s often tied to drug pipelines. However, there are some names that may seem risky but are so swarmed by bearish bettors that any sort of rally could fuel an unwind.
Insmed Inc (NASDAQ:INSM) has seen a 9% drop in short interest over the past month. This now accounts for 8% of the stock’s total available float, and per White’s calculations, shorts are looking at a steep 55% loss for INSM, if they did in fact jump in around the price of $33.66. Comparatively, peers Viking Therapeutics Inc (NASDAQ:VKTX) and TG Therapeutics Inc (NASDAQ:TGTX) shorts are staring down the barrel of -55% and -47% returns, respectively. Short sellers account for 17.1% of VKTX’s float and 23.4% of TGTX’s, for reference.
A Barron’s article titled, ‘Biotech Stocks Are Heavily Shorted. They Could Be Winners’ was published more than a year ago, the author guessing short sellers would continue to flock toward the sector even as it extends up the charts. At the time of publication, May 2023, the SPDR S&P Biotech ETF (XBI) had 56% of its shares shorted at once, and author Jacob Sonenshine suggested joining in on the action. Now, in September 2024, 64.7% of its float is sold short, while the ETF sitting near $98.35 — a 17% premium to May 2023 levels.
Circling back to our three medical research names from White, INSM, VKTX, and TGTX are looking at 141%, 215%, and 30% gains for 2024, respectively. This incredible outperformance doesn’t look likely to slow down anytime soon, especially if these underwater short sellers decide to give up and cover. That could propel these outperforming stocks even higher.
