While the major equity indices finally printed a solid performance to close out a rough week, biotechnology firm Novavax (NASDAQ:NVAX) raised eyebrows of its own. After mounting pressure from bearish traders over significant viability concerns, NVAX stock initially popped up 12%. However, prospective participants should think very carefully before diving into a clearly risky venture.
What really imposes food for thought regarding today’s robust rise in NVAX stock centers on a lack of direct catalysts. Recently, the news cycle pointed toward an incredibly negative trajectory for the biotech. For example, earlier in the week, CNN reported that Novavax itself warned it might not be able to survive. Worryingly, management stated that it faces “significant uncertainty” about future sales and funding from the U.S. government.
Fundamentally, the fate of NVAX stock largely hinges on the coronavirus pandemic. As InvestorPlace contributor Joel Baglole mentioned, Novavax announced spending cuts, focusing its primary efforts on a fall campaign of its long-delayed Covid-19 vaccine. However, two significant problems stem from this initiative.
First, Novavax raised the prospect of ceasing operations when it reported disappointing fourth-quarter 2022 earnings results. That was when it disclosed its concerns about an uncertain market environment. Second, Covid-19 fears have largely faded away. NPR also reported that the winter Covid surge is mild and fading quickly.
Ultimately, when Novavax finally releases its vaccine, its solution’s pertinence might already disappear.
Bears Chomp Down on NVAX Stock as Minor Resistance Materializes
Not surprisingly, bearish traders sense a significant (albeit cynical) opportunity in targeting NVAX stock. For the year so far, shares have already dropped nearly 22%. In the past 365 days, they’re down over 90% in equity value.
Articulating the pessimism, S3 Director Matthew Unterman stated that NVAX stock represents the most profitable short position among biotechs since it peaked at the height of the outbreak, per a Bloomberg report. The news agency also stated that “Novavax’s dramatic rout is emblematic of the dwindling demand for pandemic protection.”
Still, with the market representing an arena for bulls and bears, publicly traded securities don’t travel across perfectly linear trajectories. One explanation for the double-digit percentage jump in NVAX stock focuses on the dead-cat bounce. In this case, bearish traders must buy back the borrowed shares they sold to initiate the underlying short position. Obviously, this buyback process creates temporary upside momentum as the bears cash out.
Rationally, that may be the most sensible explanation. However, it’s also possible that wild speculation may be undergirding NVAX stock. Specifically, Novavax may attract bullish contrarians hoping to spark a short squeeze.
According to Fintel, Novavax’s short interest stands at 37.39% of float, a very elevated metric. As well, the off-exchange short volume ratio is 42.53%. Moreover, the investment resource notes that NVAX stock hit 78.09 out of 100 on its proprietary Short Squeeze Score. Here, higher numbers indicate a higher risk of a short squeeze relative to its peers.
Still, it’s risky because the short borrow fee rate isn’t particularly elevated compared to prior short-squeeze stocks. Also, with a short interest ratio of only 3.04 days to cover, it’s not remarkable.
Why It Matters
Despite the heat on NVAX stock, Wall Street analysts still carry a diplomatic “hold” rating on shares. Further, those who are bullish on Novavax are exceedingly so. At the time of writing, the average price target of NVAX stands at $55.75, implying nearly 629% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
