This sector may get whacked as short interest rises

Overall, a screen of about 1,650 mid-cap U.S. companies shows biotech stocks, on average, have a short interest ratio of about 11.6 percent, compared with the average mid-cap name's 6.4 percent in short interest, according to Starmine, a Thomson Reuters company. This suggests a greater number of bets on these stocks falling than the rest of the market.

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That is occurring as other fund managers boost their bets on the high-flying names. Fund managers now have an average of 4.1 percent of their portfolios in biotechnology companies, nearly double the level of three years ago, according to Lipper data.

We think that investor sentiment is a bit overdone, said John Fraunces, a co-portfolio manager of the Turner Medical Sciences Long/Short fund, whose fund is in the top 1 percent among long-short funds tracked by Morningstar over the last three years.

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The problem is that investors are giving people the benefit of the doubt and instantly giving a company billions in market value when there still need to be more studies to determine whether or not a drug is therapeutically effective," said Fraunces, who is looking for more opportunities to "short" stocks, or bet that the price will fall.

Some of the names attracting short bets are recent entrants to the stock market. There have been 88 initial public offerings of biotechnology companies over the last 12 months, which have gained, on average, 59.6 percent - the most of any sector, according to data from Renaissance Capital. Early-stage biotech companies rarely post any revenue, and tend to be money-losers.

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Many recent IPOs have only a small percentage of their outstanding shares trading, with some still restricted due to lock-up provisions. But the shares out in the public market are being frequently lent for short bets.

One is cancer-therapy company Kite Pharma, whose shares are up 322 percent since the company went public on June 19. About 2.7 million shares - or about 70 percent of what is available for short bets - has been lent out for shorting, according to Markit, which tracks short interest lending programs.

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This sector may get whacked as short interest rises