Every investor knows that you can profit from a stock when its price goes up -- but much less attention is given towards the strategy for making money when a stock goes down. Investors call this "shorting" a stock, and it's one tool that an investor can use to make a profit if they are feeling bearish. When an investor is short a stock, they borrow the shares from their brokerage and sell them on the market, hoping to buy back that same stock at a later date at a lower price. If they can do so successfully, they make a profit.
On occasion, Wall Street turns very bearish against a company, and a large percentage of the shares available for trading on the open market get shorted. This can happen for a huge variety of reasons, and any company can suddenly find itself on Wall Street's bad side. Biotechnology stocks in particular tend to get a lot of interest from short sellers, as they tend to be some of the riskiest companies available for investment. It's not uncommon for a biotech company to have no revenue at all, yet still sport a multibillion dollar valuation because of the promise of a drug in clinical development.
However, when you consider that 90% of new drug candidates that enter phase 1 clinical studies will fail to make it to market, and it's not uncommon for a biotech's stock price to tank on the heels of bad news, you begin to understand why these make a ripe target for short sellers.
So which biotech stocks is Wall Street particularly bearish about at the moment? A quick search on FinViz for biotech stocks with market caps over $2 billion that have the highest floats -- that is, shares available to trade on the open market -- sold short produced some interesting results.
If Revlar/Breo Ellipta and Anoro Ellita sales explode higher from here, Theravance shorts might be in for some pain ahead. However, Wall Street remains skeptical, which is why the company is so heavily shorted.
No. 3: MannKind Corporation
Last up on our list is MannKind (NASDAQ:MNKD). The company recently launched its first drug to market, Afrezza, an inhaled insulin used to treat type 1 and type 2 diabetes. First quarter sales for the drug were sluggish, as marketing partner Sanofi was only able to sell a little more than $1 million of the drug.
Investors are very bearish on the future of Afrezza at the moment -- pharma giant Pfizer tried to launch its own inhaled insulin, Exubera, years ago and failed dramatically. Afrezza offers some nice advantages over Exubera, so I think it has a better chance of succeeding, but Wall Street remains very bearish on the company.
256 million shares of the company's stock trades on the open market, and more than 131 million have been sold short, which is more than 50% of the total available shares. MannKind investors have had a rocky ride since the launch of Afrezza, and Wall Street is predicting more pain ahead. If Afrezza can prove the skeptics wrong, MannKind's stock could be primed for a huge short squeeze -- however, for the moment this is another stock that I'm going to be staying far away from.
Are any of these buys?
Just because Wall Street is skeptical about these stocks doesn't mean that they can't make for great long term investments. If I were to invest in any of these three, it would have to be Insys. The company is solidly profitable, has a clean balance sheet, and has a few interesting drugs that could find their way to market in the coming years. If we get a pullback in the market, I may be willing to find a place for the company's stock in my portfolio.
Brian Feroldi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.