Investors, listen up: Biotech stocks may be heavily shorted but could still come out on top.
Biotech stocks have been heavily shorted recently, with just under 45 million shares of the SPDR S&P Biotech exchange-traded fund (XBI) shorted as of Monday, according to financial data and analytics firm S3 Partners. Short sellers borrow and sell shares with hopes of buying them back at a lower price to lock in profits, but the risk is that a stock’s price could rise, forcing them to close their bets and send higher prices.
Negative views of biotech stocks have been largely driven by their unprofitability, which has been compounded by higher interest rates, making it difficult for these companies to raise money. But many of the negative effects of higher rates may already be reflected in the stocks’ prices, meaning that if they show any sign of bouncing, short sellers might start to buy back their shares, triggering a higher move.
— Albert Vilella (@AlbertVilella) April 28, 2023
Moreover, the biotech ETF is finding buying interest at a key level, and some smaller biotech companies could be bought at large premiums to their current market prices. For instance, Merck recently bought Prometheus Biosciences for almost $11 billion, which was roughly 75% more than the stock’s pre-deal price, as the big pharmaceutical company looks to refresh its drug pipeline.
While picking up a few shares of the ETF may not be a terrible idea, investing in these small biotech stocks can be risky. However, the potential for buyouts and short sellers covering their positions could drive prices higher, and these biotech stocks could emerge as winners.