Nothing is better for the long-term investor than a short squeeze. The short-sellers not only lose money -- they often get wiped out. It's not just pain for them -- it's tears and anguish.
When a stock that's been heavily shorted starts to move higher, the short-sellers have to cover -- that is, they have to buy the stock -- propelling the shares even higher. Since the potential for loss is infinite, it becomes a death spiral for the shorts.
One of the most heavily shorted industries is the biotech industry. If we can find situations that have heavy short interest, plus good hedge funds as investors, then we're in great shape. It just so happens that at Stockpickr we track these situations in the
Look at what happened to
, which has more than 41 million shares short. Last Monday, May 21, the company announced that it had received a "bad news" letter from the Food and Drug Administration relating to its cancer vaccine, probably what the short-sellers were hoping for.
However, because of the bad news, the company laid off 18% of its workforce. That caused the price of the stock to jump by more than 5.5% in one day, much of which could be attributed to short-covering.
Dendreon had a much greater spike at the end of March, doubling in price in one day, after positive news came in from the FDA about its prostate cancer vaccine. This was at a time when one-quarter of the company's shares were short. All that a heavily shorted stock needs is a positive surprise to send the share price sharply higher. Biotech stocks are all about surprises, one way or the other.
The short interest in
increased by almost 19% last month in spite of the fact that the company is being acquired by
. Are short-sellers of the company, which has a nasal spray flu vaccine, betting that the company purchase won't go through?
One professional who believes in MedImmune is famous corporate raider
. So there are shorts on one side and Carl Icahn on the other. Also involved in MedImmune is another former corporate raider, Nelson Peltz, through his
short interest increased by 5% last month. Its stock reached an all-time high last week when the company reported that its psoriasis drug candidate was successful in a midstage trial. The stock is owned by the
, which has generated a 17.2% average annual return for the last 10 years.
has had a slight drop in its short interest but still has about 13 million shares short. Among those that own shares of this name is
, a successful multibillion-dollar hedge fund operated by Louis Navellier.
Other biotechs with a high short interest can be found at the
page on Stockpickr.com. For more names in other sectors, check out our
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
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