|By Scott Matusow|
|Wednesday, 03 October 2012 04:45|
Long side traders if they are cash only in, can ride out bear raids and hold "bags" indefinitely. Short sellers cannot because they are 100% borrowed. I once had a friend who made over $5M dollars in a very short period of time shorting stocks. He thought he could never lose and would indefinitely continue shorting and holding his shorts -- until he got "squeezed" on 2 huge short plays and lost that $5M in about 3 weeks. Opko Health Inc. (NYSE: OPK) looks like a strong short squeeze candidate.
Opko engages in the discovery, development, and commercialization of novel and proprietary technologies primarily in the United States, Chile, and Mexico. It develops a range of solutions, including molecular diagnostics tests, point-of-care tests, and proprietary pharmaceuticals and vaccines to diagnose, treat, and prevent various conditions. The company is developing molecular diagnostics tests to identify molecules or immunobiomarkers for Alzheimer's disease, non-small cell lung cancer, and pancreatic cancer, and other cancers.
Let's get right down to it -- Opko has been severely over-sold for awhile now. Investors/traders have sold short about 25% of the company's float, which in my opinion, is over-sold at the current price level.
Yes, I have heard the short thesis on it and they make some decent points -- but at a higher price level than where it is currently trading at. With roughly $40 million in annual revenues and a $1.25 billion market capitalization, at first glance, the company does seem over-valued.
However, I cannot help to wonder if the short sellers in Opko have considered the possibility that Dr. Phillip Frost might just get impatient with his buying the company shares slowly over time and decides to buy back a monster block at once, say 20M shares or so. I have to wonder what the short sellers think their upside is in this one. I feel the downside risk for short sellers is very high, and if this runs on them because Dr. Frost decides to get more aggressive in his buying, I can see the shorts getting super squeezed, with many facing potential margin calls. At some point, Dr. Frost will just own too many shares and he is not likely to sell -- which would leave the shorts scrambling to cover at much higher prices.
Dr. Frost's history in brief:
Frost bought Key Pharmaceuticals, Inc. in 1972. Dr. Frost was Chairman of the Board of Directors of Key Pharmaceuticals from 1972 until its acquisition by Schering-Plough in 1986 for $600 million. Frost's share was $100 million
He also served as Chairman of the Board of Directors and Chief Executive Officer of Ivax Corporation since 1987, and sold the company for $7.4 billion to Teva Pharmaceuticals (NYSE: TEVA) in January 2006.
Frost was also one of the first and largest investors in Protalix BioTherapeutics (AMEX: PLX), investing $24 million in the company that would later go on to develop a U.S. Food and Drug Administration-approved treatment for Gaucher disease. He resigned from the company's Board of Directors in 2007.
Dr. Frost is a billionaire -- He alone if he so chooses to do so, can buy up the entire Opko trading float himself potentially causing a monster short squeeze.
The short squeeze can be a very profitable trade, in fact under the right circumstances it can return massive gains in less than one trading day. A recent example is Peregrine Pharmaceuticals (NASDAQ: PPHM), which opened at $0.83 on September 24th after the company told analysts they should not rely on recently disclosed data about its lead product, the potential lung cancer treatment bavituximab.
The company said that it discovered "major discrepancies" between some patient sample test results and treatment code assignments when it reviewed mid-stage trial data. The company is studying bavituximab as a second option for non-small cell lung cancer.
The big mistake many short sellers made on Peregrine is that they shorted the open after the stock plunged from a prior day's session price of over $5. The smart short sellers were in much higher, when the company had much more downside potential -- those shorts covered at the open and many went long in anticipation of institutions quadrupling down on their long positions and other short covers. In the same trading session, the stock ran to a high of $1.57 on 9/24/12, as many shorts raced to cover.
*Recent Insider Transactions
I have to stop at July 1st, otherwise this article would be as long as a standard non-fiction novel. Obviously Dr. Frost has been buying up a ton of short sellers and is slowly eating up the available trading float. Yet the shorts still short away, and I do not think many of them understand the potential danger they are putting themselves in.
For those comparing Opko with MannKind Corporation(NASDAQ: MNKD), I would point out that the situation is very different. With Mannkind, Billionaire owner Alfred Mann has added shares to the trading float via dilutive financing. He has not bought shares as Dr. Frost has been engaging in with Opko.
I have to ask myself why Dr. Frost continues to buy up shares like a binge drinker sucks down booze -- is he crazy? Is it because he is growing senile? -- I would not bet on that. It's my opinion that Dr. Frost has something up his sleeve that will ultimately squeeze the shorts like a Boa-Constrictor squeezes it's prey.