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Pharmaceutical Short-Squeeze Opportunities - 10918 views
By Jonas Elmerraji
Posted on March 10, 2010, at 10:44 a.m.
If there’s one industry that traders like to target, it’s the pharmaceutical indsutry. After all, pharma plays can make huge intraday profits on fast-moving FDA news, rumors and even speculation. And pharmaceutical companies have largely been immune to the health care reform uproar on both sides of the aisle on Capitol Hill -- because no matter how we pay for the next breakthrough drugs, the companies that develop them will continue to collect significant revenues.
But some of the biggest pharma gains are in the short squeezes.
A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors, causing share price to skyrocket. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
Each week, Stockpickr creates a portfolio of stocks with high short interest ratios and the catalysts to trigger a squeeze. Here’s a look at this week’s potential plays, which focus on pharmaceutical industry stocks.
$3.1 billion pharmaceutical firm Valeant Pharmaceuticals (VRX) has been one of 2010’s strongest performing stocks, up nearly 21% year-to-date. But that strong showing on Wall Street hasn’t stopped short-sellers from swooping in. Valeant currently sports a short interest ratio of 11.43, which suggests it would take more than two weeks of normal trading for short sellers to cover their positions.
The company has been going through a number of changes in recent years, largely in response to the global slowdown that threatened to slow the company’s sales for more discretionary offerings. This year’s early restructuring results and drug pipeline suggest that Valeant is on the road to even better performance for the rest of 2010.
One firm that’s hoping that to be the case is value-oriented VA Partners, a $1.5 billion hedge fund. VA’s other holdings include Equifax (EFX) and Annaly Capital Management (NLY).
While not a pharmaceutical developer, medical supply company West Pharmaceutical Services (WST) has a business that’s deeply entrenched in the pharma industry. West supplies drug developers and medical firms with the packaging and drug delivery systems that help them to reach consumers safely. The stock meets our high-short requirement too, with a short ratio of 18.
While most companies have seen their revenues soften of late, West actually managed to see annual sales growth for the last several years while nearly doubling its cash reserves and holding its total debt relatively constant. With strong financial health numbers, liquidity shouldn’t pose a problem for the supplier in 2010, even if the presently unsettled economy continues to flounder.
Institutions dominate shares of this small company; investment firms own 95% of the company’s outstanding stock. One of West Pharmaceutical Service’s biggest institutional owners is the Stratton Small-Cap Value Fund (STSCX), an $856 million fund that holds Morningstar’s four-star rating. Among the fund’s 76 other holdings are Netflix (NFLX) and Chicago Bridge & Iron (CBI).
Theravance (THRX) is a biopharmaceutical company that focuses on developing commercial drug therapies. The company’s shorts -- and short ratio of 14.65 -- have done a good job of holding share prices down in 2010 at the heels of some FDA-induced speed bumps in the approval of one of the most promising drugs in the company’s pipeline.
But with the next steps for Theravance clear now, the company could see positive action in the short- to mid-term. One FDA advisory panel has already voted in favor of the drug’s approval, and more could well be on the way. As Theravance readies its next phase III study, shares could appreciate in a big way on any inkling that the FDA sees the company’s newest therapy in a positive light.
A firm that’s certainly hoping for that is Sowood Capital Management, a Boston-based hedge fund that also owns stakes in International Paper (IP) and Dollar General (DG).
For the rest of this week’s short-squeeze opportunities, including Halozyme Therapeutics (HALO) and Dr. Reddy’s Laboratories (RDY), check out the Pharmaceutical Stock Short-Squeeze portfolio at Stockpickr.
And to find short-squeeze plays of your own, be sure to check out the Stockpickr Answers community for insights and investment ideas.
At the time of publication, author had no positions in stocks mentioned.
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