P(Short?)B:
Nice (nasty?) set of one-liners.
If you take (the not unreasonable) position that shorts are in general more sophisticated than longs, it makes sense that for most of the heavily shorted stocks there is in fact a good "short story."
Something that we perhaps don't do enough of on SI is to present the short case for biotech stocks. Partly, people get upset at those who do so. We are kind of used to a overall bullish miasma stemming from the companies themselves, most analysts who follow them and the general population of longs. We are (or should be) used to discounting this bullishness, but are not so used to discounting short recommendations which are few and far between. Thus any short stands out sharply and will likely be attacked. It of course doesn't help that a good portion of the shorts on the boards are idiot daytraders and/or rumor-spreading nasties.
Bottom line though is that while most sensible biotech investors are content to say nice things about the stocks they are long, they are not comfortable saying nasty things about the stocks they may be short.
A further complication is that so much is typically unknown about how programs at biotechs are really progressing. Even assuming management has asked the hard questions themselves about their own programs (a very big assumption at many companies) how much do they tell us? Given this background, it is very hard to refute a rumor like "I heard from big pharma X that their collaboration with biotech Y is going badly."
That is partly why there is so much focus on how a company's first product does early on. This is the first "objective" evidence that analysts and shorts (one chunk of which are quantitative types) can get their hands on.
CELG is a good example of this type of thinking. It has a product where initial sales have been somewhat slow. Thalidomide was approved for a complication of leprosy, and it is very easy for a (naive) short to ask when you last saw a leper. So the short combines a small initial market with slow initial sales and comes to the conclusion that the product is a long-term loser.
I own CELG because I think that the Thalomid market is simply slow to build, but will ultimately be substantial. That difference of opinion (and perhaps of timing) is what makes a market.
Incidentally, GELX is a similar example. They have a product (Renagel) that is a phosphate sequestering drug used by dialysis patients. The drug is clearly medically superior to the alternatives (calcium or aluminum salts), which are, however, cheap. The ultimate market is not just dialysis patients, but many earlier-stage renal patients. My view is that the weakish early sales don't say anything about the sales three or four years down the road, and the stock is now cheap for those willing to take the longer view.
PGNS is of course the counter-example for those too sanguine about a product's long-term market build. There we had very strong initial sales that then abruptly reversed as the initial market saturated much earlier than everyone (except some smart shorts) had been predicting.
Peter |
