Legit short squeezes are fairly rare. But when they do occur, shareholders of heavily shorted equities can generate enormous returns on capital in an exceedingly short period.
Which under-the-radar equity stands out as a top short-squeeze candidate right now? The developmental biotech Anavex Life Sciences (AVXL +0.00%) ticks off some of the most important boxes in this regard.
First off, the biopharma's shares have attracted an increasing number of short-sellers over the prior six months, resulting in nearly a quarter of its float being sold short as of Jan. 13, 2023. Secondly, and perhaps most importantly, Wall Street analysts -- at least those with a bullish view on the company -- think Anavex stock is massively undervalued right now.
AVXL Short Interest data by YCharts.
Here is a breakdown of Anavex's appeal as a potential short-squeeze candidate.
Anavex's complex value proposition
Anavex is a late-stage drugmaker with promising candidates in Alzheimer's disease, Parkinson's disease, Rett syndrome, and Schizophrenia, among others. The company's lead asset is known as Anavex 2-73 (blarcamesine).
Last December, blarcamesine reportedly hit the mark in a late-stage trial as an oral treatment for patients who have Alzheimer's disease. This single indication could be worth upwards of $5 billion in annual sales, despite the recent Food and Drug Administration (FDA) approval of the intravenously administered Alzheimer's therapy Leqembi.
Under normal circumstances, pre-revenue biopharma stocks generally garner multiples in the range of three to five times the peak sales estimate of a lead product candidate. This historical trend is especially true among clinical-stage drugmakers with positive late-stage results in hand.
Yet, Anavex is presently valued at a mere $887 million at the time of this writing. This paltry valuation does not adequately reflect either blarcamesine's ginormous commercial opportunity in Alzheimer's disease or its other potential indications.
Driving this point home, Jones Trading analyst Soumit Roy issued an $80 price target on the biotech's stock in the immediate aftermath of blarcamesine's late-stage win in Alzheimer's disease. This price target implies a staggering upside potential of 628%.
What's with the disconnect?
Central nervous system (CNS) disorder drugs have a troubling history in the clinic. The fact of the matter is that only a tiny handful of experimental CNS drugs -- especially those targeting neurodegenerative disorders like Alzheimer's -- ever make it to market.
Topping it off, Anavex's platform hasn't attracted a major partner in the form of a cash-rich licensing deal. That's noteworthy because big pharma has invested heavily in numerous high-risk CNS assets over the prior two decades.
Taken together, these two issues appear to have emboldened short-sellers. The net result is that Anavex's shares are currently trading well below most analysts' 12-month price targets, although the biotech's shares have started to melt upwards to a degree over the past 30 days.
NASDAQ: AVXL
Key Data Points
Can Anavex prove bears wrong?
Anavex is expected to release the full study results from blarcamesine's late-stage Alzheimer's trial later this year. What's more, the drugmaker is also on track to announce topline results from a phase 2/3 Rett syndrome trial at some point this year.
These upcoming material events could be major catalysts for the stock and, perhaps, convince short-sellers to move on to greener pastures. That's far from a guarantee due to the unpredictable nature of clinical trial results in general. But the necessary conditions do exist for a possible short squeeze in Anavex's shares at some point in 2023.
