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Barry Cohen
Barry Cohen
Articles (277) 

Big Pharma Short Percentage Is Below Overall Market

For most companies, numbers have been on the rise

Even investors that don't own the stocks must have had their interest piqued about the goings-on with GameStop Corp. (NYSE:GME), AMC Entertainment Holdings Inc. (NYSE:AMC) and Express Inc. (NYSE:EXPR). The companies were involved in a "short squeeze" that saw the shares of all three struggling companies gyrating wildly. GameStop, for instance, traded as high as $483 at the end of January, but has since lost about 90% of its value.

When someone shorts a stock, they're selling a security they don't own with the hope they can buy it back sometime at a lower price and pocket the difference. This is a common strategy of hedge funds, but it's also available to individual investors who are wise to be cautious. If you own 100 shares of a stock selling for $10, the most you can lose if it goes to zero is $1,000. Conversely, if you short a stock at $10, there is no bottom to your potential loss if the stock soars.

A short squeeze occurs when people are buying the shares, which forces short sellers to buy, too, to avoid incurring large losses. That's what happened with GameStop, AMC and Express.

Investors also short large, stable companies. In the case of members of Big Pharma, "short interest" is low, but the numbers have increased since the previous month they were tallied.

Is this a sign the biggest drug companies are a bad investment? Not necessarily. A jump in the short ratio (short interest as a percentage of the company's float) can be good or bad. A low short interest ratio means that not many investors think the stock's price will decline. At the same time, a high short interest ratio can be good for shareholders if the stock starts to climb. That's because the short sellers have to rush in to cut their losses, and the share price usually spurts.

In general, short interest as a percentage of float below 10% indicates strong positive sentiment, above that it could be the market is pessimistic; anything higher than 20% is a red flag.

The average stock across the S&P, Dow Industrials, Nasdaq 100 and Russell 2000 has just over 2% of its float sold short, a 17-year low, according to Sentiment Trader. Every major drug company has an even lower percentage, as seen in the chart below.

Company

Current Short Volume (Millions of shares)

% Change vs. Previous Month.

Short % of Float

Eli Lilly and Co. (NYSE:LLY)

6.7

28.2%

0.84%

Johnson & Johnson (NYSE:JNJ)

15.6

15.8%

0.60%

Merck & Co. Inc. (NYSE:MRK)

18.6

16.3%

0.73%

Pfizer Inc. (NYSE:PFE)

63.1

-3.3%

1.14%

Gilead Sciences Inc. (NASDAQ:GILD)

21.6

0.0%

1.72%

AbbVie Inc. (NYSE:ABBV)

14.9

11.6%

0.84%

Amgen Inc. (NASDAQ:AMGN)

7.6

9.0%

1.31%

Sanofi (SNY)

5.45

0.7%

NA

GlaxoSmithKline (GSK)

14.2

9.0%

NA

Bristol-Myers Squibb Co. (NYSE:BMY)

19.5

30.0%

0.86%

AstraZeneca (AZN)

65.9

97.0%

NA

Novartis (NVS)

5.35

20.8%

NA

Disclosure: The author has a position in Eli Lilly, Johnson & Johnson, Gilead Sciences, AbbVie, Amgen, Sanofi and Bristol-Myers.

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About the author:

Barry Cohen
Barry Cohen has nearly 40 years experience in communications and marketing, the majority in senior positions at large international health care companies, including Abbott Laboratories and Bayer Inc.

He has contributed to a number of financial websites, writing primarily about the stocks of health care companies.

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