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A Beaten-Down Biotech Stock Poised for an Epic Short Squeeze

Stocks in this article: GERN KPTI ECYT

Correction: Removed content that incorrectly stated that progression-free survival is a more challenging clinical trial endpoint to achieve than overall survival. The opposite is true.

DELAFIELD, Wis. (Stockpickr) -- The biotech sector is not the place to be short right now, especially when dealing with some of the beaten-down small-cap names.

>>5 Hated Earnings Stocks You Should Love

Just last week, I flagged shares of small-cap biotechnology player Geron (GERN) as a short-squeeze candidate at around $2.10 a share. Shares of GERN didn't wait long to get that short squeeze started. The stock exploded higher that same day and the following two trading sessions before tagging its recent high of $3.47 a share on June 12. That represents a gain of over 60% in just a few days for anyone who caught the move in shares of GERN.

Another biotech that absolutely annihilated the short-sellers last week was Karyopharm Therapeutics (KPTI), which exploded higher by over 90% after Wall Street cheered its release of its initial phase I data for Selinexor. I flagged this stock stock in June 3's "3 Big-Volume Stocks in Breakout Territory" at around $26.50 a share. KaPTI tagged an intraday high of $47.98 a share last week on monster upside volume.

>>5 Toxic Stocks You Should Sell This Summer

I love spotting hot biotech stocks that have the potential to make big moves and squeeze the shorts. The next biopharmaceutical player that's setting up from a technical perspective to put a big hurting on the short-sellers is Endocyte (ECYT), which develops targeted therapies for the treatment of cancer and inflammatory diseases in the U.S.

Shares of Endocyte plunged back on May 2 by a whopping 62% after the company said it was halting its phase III study for vintafolide. The company decided to stop the study after it failed to show efficiency when treating patients with platinum-resistant ovarian cancer. That was a surprise to Wall Street, especially since a recent trial Endocyte had conducted for non-small-cell lung cancer had shown favorable data.

That phase III failure and subsequent collapse in the stock price for Endocyte has now created a unique opportunity, since the company is running trials for vintafolide as a treatment for lung cancer. That trial is currently in phase IIb testing, and key data results could come out at the end of 2014. RBC Capital Markets analyst Adnan Butt recently said that the lung cancer indication is the most important one because the market is bigger.

>>5 Stocks Poised for Breakouts

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