Short Squeeze Potential On ALEC Gets Hotter

At the start of this week we talked about the short squeeze potential on Alector, Inc. (ALEC). That potential has just gotten bigger as the stock has steadily risen from $35 during a shaky week for the markets and is set to open above $40 on Friday. ALEC rose 57% last Friday after signing a $2.2 billion deal with GlaxoSmithKline (GSK) to co-develop progranulin-elevating monoclonal antibodies, AL001 and AL101, for a range of neurodegenerative diseases. This deal includes a $700 million upfront payment, including $500 million coming in Q3, which is key to understanding the potential of the short squeeze. According to Yahoo Finance, ALEC has 6.7 million in short interest. This is 12% of the float, but consider that volume has tapered off quite a bit this week to an average of 2 million shares traded on Wednesday and Thursday. So it will get harder and harder to cover that short as volume goes down but price goes up. 


























What is going on here? Certain funds were shorting ALEC not because they hate the company, but because they thought ALEC will need to do a financing soon. They are vultures who short the stock then try to cover by looking for cheap financing deals. This is where the problem lies for them. With $700 million upfront payment coming, this should be sufficient for ALEC to cover all its cash needs in the foreseeable future. No cheap financing deal will come. Shorts tried to catch ALEC desperate for cash and take advantage of a vulnerable company. Now the tables have been completely reversed as shorts may be the ones in financial trouble, having taken a beating last Friday and potentially forced to cover at an even higher price.

There is a recent example similar to ALEC which is Intellia Therapeutics, Inc. (NTLA). Looking at its Yahoo Finance stats, you can see how similar it is to ALEC. Particularly with short interest and the short percentage of float. 

























On June 28, NTLA shot up 50% to $133.43 and shorts were screaming for a pullback, assuming a financing would happen at a low price. Instead the financing happened at $145 and the stock squeezed to over $200 two days later. Even with the pullback it's still in the $150's. This is the exact same thing we expect to happen on ALEC. Watch ALEC closely today and into next week.

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