Biotech companies can have highly uncertain futures because their success often depends on government approval of their product, which may sometimes take over a decade to develop and test. Because of the high barriers to success, some large investors like to short these stocks, but others like to bet on their approval. Learn more about these terms below.
Institutional investors are also known as "big money" investors. They manage large pools of money such as mutual funds and hedge funds. When they invest in stocks, they can invest hundreds of thousands of dollars or more at one time. These transactions, called "block trades," can have a significant effect on share prices.
Because institutional investors handle such large amounts of money, it is easy enough to assume that the big money managers know more than the average investor. This is why these investors are also sometimes referred to as "smart money," and why their trades are so closely followed.
When an investor sells a stock short, they stand to profit if the share price falls. To short-sell a stock, the investor must borrow the shares from someone else. Doing so implies the use of margin, or borrowing ability from the brokerage. Because of this, the investor must go through background checks, so it usually means that they are a more sophisticated investor.
When those investors begin to buy back the shares they are borrowing, short covering occurs. This could mean that the investors believe the stock has reached its lowest point, and might be on the way back up. In general:
Short-selling = BEARISH perspective on the stock
Short covering = BULLISH perspective on the stock
Business section: Investing ideas
We started this screen with biotech companies with market caps over $300M, and then checked institutional and short transactions. We found that institutional investors were buying the stock, while short-sellers were increasing their positions. Could this mean the institutional investors are expecting to see a short squeeze in the near future?
List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)
1. Questcor Pharmaceuticals
2. Amylin Pharmaceuticals
4. Momenta Pharmaceuticals
5. Spectrum Pharmaceuticals
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Daniel Guttridge does not own any of the shares mentioned above.
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