Is OPKO Health Setting Up For A Short Squeeze?

| About: OPKO Health, (OPK)

OPKO Health, Inc. (OPK) is a pharmaceutical and diagnostics company engaged in the development of several proprietary technologies. It is also the holder of several strategic investments in medical device and pharmaceutical companies. OPKO's product pipeline addresses diseases ranging from Alzheimer's disease, to chronic kidney disease, to prostate cancer, and vitamin D insufficiency to name a few.

OPK Chart

OPK data by YCharts

Over the past few years, OPKO has steadily grown its share price. Through multiple strategic acquisitions made through stock-based transactions, OPKO has managed to effectively utilize its rising share price in order to raise the overall value of the company. One aspect of the company that has continued to weigh heavily on investors is the bullish nature of the CEO, Dr. Phillip Frost. As seen in an example of the recent insider purchases found below, Frost continues to aggressively buy shares of the company on the open market:

Armed with a fortune amassed during his previous pharmaceutical endeavors, Frost's conviction in OPKO has been a beacon of strength for investors who view his purchasing habits as a sign of confidence in the company's future. This has only been further fortified by the promising potential of the product pipeline as seen in the article found here. However, another aspect of the company that has often been overlooked is the growing short interest. To date, the percent of the share float that is short has climbed to an alarming 28.5%. As such, the company could be readying itself for a potential short squeeze as defined here.

The Growing Short Interest

One trend to watch for is the rather high short interest now plaguing OPKO. As of the last measure taken on December 31, the company carried a short interest of 44.6 million shares. As seen in the graphic below, this represents a cover ratio of 9.49 based on the average daily share volume of 4.7 million at the time of the reading.

Partially shown above and further verified here, the company's short interest has steadily climbed over the past year. The interest has climbed to a high of 44.6 million as of December 31 from a low of 23.9 million on January 15, 2013. We see that the relatively consistent trend coincides with both the start and end of the year. Additionally, we find that approximately 12 million shares were shorted between the latest dip from the end of October through December when the share price was between $10 and $8.5. Any rise above this price range could place additional pressure on those already short the company.

From the middle of June 2013 to the end of October 2013, OPKO's share price rose from $7 to $10 while the short interest remained relatively the same around 32 million. The one distinctly noticeable difference was the change in average share volume which increased from 1.6 million shares to 5.5 million shares. This reduced the cover ratio from 20.6 days to a mere 6 days. As a result of the increase in volume, short traders were able to enter and exit their positions with greater ease and the threat of a squeeze subsided.

However, the average share volume once again is on track to subside. A recent look at the historical prices chart shown above illustrate that the average volume has continued to fall. Over this time period, the average share volume has been reduced to 3.2 million, a significant drop from the 6.6 million shares just a month prior. Based on the last reading of 44.6 million shares, this would represent a cover ratio of 14 days, a significant increase from the reading shown in the chart below.

OPK Days to Cover Short Chart

OPK Days to Cover Short data by YCharts

Additional Thoughts

Opko now trades with a market capitalization of $3.55 billion as of January 17, supporting an already lofty price-to-book ratio of 4.11. As a result, the company appears to be an enticing short target. Ironically, as witnessed by the strong correlation between short interest and share price, the short thesis has established a lengthy track record of being inaccurate as shown in the chart below.

OPK Chart

OPK data by YCharts

Part of this relationship undoubtedly remains tied to the intense insider buying activity conducted by the company's CEO himself. Frost has continued to buy shares on a near daily basis since assuming his position in 2007. The officer now controls roughly 153.3 million shares of the company, representing 38% of the shares outstanding.

As a result of this complex situation, we see a rather interesting scenario now unfolding. The short interest is continuing to grow. The share float is continuing to decrease. Consequently, the percent of share float that is short continues to rise. Last of all, this is all occurring as the cover ratio begins to rise in light of a falling average share volume.

OPK Percent of Float Short Chart

OPK Percent of Float Short data by YCharts

As a developing pharmaceutical and diagnostics company, OPKO is prone to large price swings due news that may not have any commercial impact for years in advance. As such, the company may be subject to an increased risk in a short squeeze if the ongoing trend continues. Already, the company has several potential near-term catalysts in store as outlined in the interview with Frost found here. As such, short investors should take caution in light of the possible short squeeze situation developing behind OPKO's current share price.

Disclosure: I am long OPK, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.