The Two Best Biotech Short Squeeze Candidates And The Next Carvana

With the market having recovered most of its recent drop to be near all-time highs once again, shorts have been destroyed and are in a desperate spot. Heavily shorted stocks like B. Riley Financial, Inc. (RILY), Globe Life Inc. (GL) and Carvana Co. (CVNA) have been on absolute tears. We have written about CVNA before, as well as the impact of CVNA's move on Root, Inc. (ROOT). When a stock is squeezing like CVNA, a related stock like ROOT will follow suit. Shorts are often shorting multiple related stocks. Most don't even hide it with Kerrisdale openly bragging about its poor track record. GL was another one that was attacked by shorts which we talked about as a gamma squeeze candidate that has worked out very well over the past three weeks. 

In this market of short squeezes, we have identified two excellent biotech short squeeze candidates, ImmunityBio, Inc. (IBRX) and Soleno Therapeutics, Inc. (SLNO). IBRX is starting up the production and sale of its cancer drug ANKTIVA. SLNO received breakthrough therapy designation from the FDA for its Diazoxide Choline tablets for Prader-Willi Syndrome. SLNO will be filing a new drug application in the next few weeks.  At first these stocks don't seem related at all. But if you take a look at their charts since they both broke out around the same time, you see that they are closely correlated:

IBRX is a highly shorted stock and a popular short squeeze candidate right now. It has a formidable mix of high short interest, positive catalysts and an expectation of vastly improved financial performance in the near term. IBRX has 55 million in short interest, 37% of the 145 million float. It initially ran to over $10 at the end of April, doubling in two days. Now that it has settled around $8 and the volume is dissipating, shorts who haven't already covered are getting exposed again as the days to cover increases.

Short interest on IBRX has increased by about 20 million from 35 million to 55 million since November 15th of last year. That means a substantial portion of shorts were opened when the stock was trading around $4 or $5. Shorts are drowning with potentially greater than 100% losses right now. This is the type of environment you want to see for a squeeze. Shorts are in the red, the company has positive catalysts and improved financial prospects, and dissipating volume but the stock price remains robust so the ability to cover at a decent price gets harder and harder. We think another string of margin calls will happen on shorts, sending IBRX to $15 or higher. 

Biotech shorts rarely focus on one stock. They like to short multiple runners at once. SLNO is another one they got caught up in, and the evidence is not only with the highly correlated price chart but also with the timing of the increase in short interest. SLNO's short interest has increased from less than 600,000 to 3.4 million since November 15. When looking at these statistics side by side, it's interesting to see how similar they are:

SLNO doesn't have the sheer number of shorts as IBRX, but its float is only 15 million shares. That leads to a short interest of 22%. Back in November, SLNO was around $23. So just like IBRX, SLNO shorts are drowning in 100% losses. 

We believe that IBRX and SLNO are going to continue to have high correlation with each other. Not because they are remotely closely tied from a business perspective, but because the same entities that are shorting one are shorting the other, and both positions are on the brink of collapse. If longs on IBRX want to facilitate a squeeze on IBRX, going long on SLNO is one way to see that happen. Just like how CVNA eventually drove ROOT to squeeze. Then ROOT's squeeze drove more covering pressure on CVNA in a positive feedback loop. 

On the topic of CVNA, Dave Inc. (DAVE) looks like the next Carvana. Just like CVNA, DAVE had dropped to less than $5.00 and looked on the verge of going belly up. However, improved financial performance has caused the stock to move over 1,000% over the last few months, similarly to CVNA. Just like how CVNA produced a record quarter, DAVE did as well where revenue, margins, EBITDA and net income have all vastly improved. 

Short interest on DAVE is not as substantial as it is on the other stocks mentioned here but because of its low trading volume, actually has comparable days to cover. It also had only a 7 million float so its 700.000 in shorts leads to a short interest of 10%

Short interest has only grown around 200,000 from mid-November, but the stock price has increased 10x from there. Anyone stupid enough to not cover at that time has gotten absolutely demolished. What has likely happened is that some shorts covered at losses, then others came in at a higher price than $5, but still well below market prices seen today. Eventually those 700,000 in shorts will capitulate and have to cover. With the stock trading less than 100,000 shares most days, that type of covering will enact a substantial squeeze.