Please ensure Javascript is enabled for purposes of website accessibility

3 Signs the Ligand Short Squeeze Is Over

By Jason Hawthorne - Apr 22, 2021 at 6:40AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Reddit crowd wasn't the only reason short-sellers got burned betting against this pharmaceutical company.

The market seemed to defy logic in late January, when the WallStreetBets subreddit became a platform for organizing retail investors against short-sellers. In the frenzy of actions that followed, a number of companies that seemed long past their primes saw their share prices spike temporarily, despite a lack of any significant improvements to their underlying businesses. And those surges didn't just affect well known companies. Virtually any stock with a high percentage of its shares sold short had the potential to be pumped up with dramatic short-term gains as retail traders attempted to create short squeezes.

Ligand Pharmaceuticals (LGND 1.52%) was one of the lesser-known stocks that benefited from all of this. There are several reasons to believe the drama is over for the biopharmaceutical. But that doesn't mean there aren't still reasons to buy the stock.

A woman looks at a stock chart that has a high peak and comes back down.

Image source: Getty Images.

1. Short interest has dropped

When someone sells a stock short, they are betting its price will decline. The mechanics can seem complicated, but it's relatively straightforward. Being "short" means that an investor has borrowed stock they don't own, and then sold it in the hopes that they'll be able to buy it back at a cheaper price later in order to return it to the entity from whom they originally borrowed it.

If the stock price goes down, that scenario plays out as planned and the short-seller profits. If the stock price goes up, the trader still has to buy back the shares to return them, and therefore loses money. When a lot of short-sellers are in positions where they're going to lose money on a specific stock, it can create a buying frenzy as they seek to close their positions and limit their losses, which pushes the stock's price up still further.

That's called a short squeeze, and it's what happened earlier this year to Gamestop and AMC Entertainment, as well as some lesser-known companies like Ligand Pharmaceuticals.

From 2014 through the middle of 2018, about 20% of Ligand's outstanding shares were sold short. That rocketed to 67% over the next year. The jump got the attention of the Reddit crowd, whose relentless buying more than doubled the stock's price from where it began 2021. Though the feedback loop of the short squeeze ran out of fuel and Ligand's stock price headed back downward, it is still up 45% year to date, but the percentage of shares outstanding that are sold short has dropped to less than 10%.

LGND Percent of Shares Outstanding Short Chart

LGND Percent of Shares Outstanding Short data by YCharts

2. The company reported great results

Ligand's goal is to be a high-growth business driven by royalty contracts. During February's earnings call, CEO John Higgins outlined four key areas of strength for the company: its antibody discovery platform, its work with Gilead Sciences (GILD 0.89%), acquisitions, and financial performance. Let's consider them one by one.

OmniAb, the company's antibody discovery platform, uses artificial intelligence and genetic engineering to produce fully human antibodies from animals. More than 40 biopharmaceutical companies and universities are customers, using these antibodies in research. Management expects a Chinese company to receive the first ever approval of a drug developed using the OmniAb platform this year.  Antibodies are in high demand; the success rate of medicines developed with them is nearly twice that of small-molecule drugs.

Capitsol is another Ligand product. It's designed to improve the stability and solubility of drugs. The ingredient is a key component in Gilead's Veklury (remdesivir) treatment for COVID-19. It's widely used in drug development, where Amgen, Eli Lilly, Merck, Pfizer, and Bristol-Myers Squibb are also customers. 

Growth through acquisitions has been a core part of Ligand's business strategy over the years. The company bought OMT (the developer of OmniAb) five years ago, and CyDex Pharmaceuticals (which owned Captisol) a decade ago. In the past year, management stuck to that strategy, acquiring Pfenex, which had developed a valuable protein-expression platform, and buying the assets of Icagen, including an ion-channel platform. Both are expected to bolster Ligand's antibody business.

And finally, there's the company's financial performance. It grew revenue 55% to $186.4 million in 2020, while adjusted net income was $4.55 per share, up from $3.09 in 2019. Ligand expects to continue adding more partners and collecting more milestone payments this year. In fact, management raised its 2021 guidance to $291 million in revenue and $6.15 in adjusted EPS, which would represent annual increases of 56% and 35%, respectively. With that type of performance, you might be surprised to find shares trading at only 23 times adjusted 2021 earnings.

3. Management is willing to buy back shares

Since 2018, Ligand has reduced the number of shares outstanding by 22%. During November alone, the company repurchased nearly $5 million in stock at $84 per share, significantly below where it currently trades. 

LGND Shares Outstanding Chart

LGND Shares Outstanding data by YCharts

Though the company has recently expressed more interest in spending on acquisitions and retiring debt, Ligand still has considerable excess cash, and management believes shares are significantly undervalued. The recent deals and impressive financial results, plus management's clear willingness to deploy cash on share buybacks, are likely to dampen any further interest in shorting the stock.

Ligand's stock price in early 2021 took a roller-coaster ride. That said, the company has been consistent in its execution. It has delivered revenue and profit growth, and appears ready to add partners and royalties as products hit the market. With a forward price-to-earnings ratio that's half its growth rate, it's easy to argue that Ligand stock is cheap.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ligand Pharmaceuticals Incorporated Stock Quote
Ligand Pharmaceuticals Incorporated
$90.58 (1.52%) $1.36
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$62.36 (0.89%) $0.55
GameStop Corp. Stock Quote
GameStop Corp.
$123.42 (0.92%) $1.12
AMC Entertainment Holdings, Inc. Stock Quote
AMC Entertainment Holdings, Inc.
$13.53 (-0.15%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.