Why are short sellers targeting PolyNovo shares?

Why are PolyNovo shares so heavily shorted?

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Key points

  • PolyNovo shares are among the most shorted on the Australian share market
  • This appears to have been driven by a number of factors
  • This includes a poor operating performance and a potential biotech bubble

As readers might have seen earlier today, PolyNovo Ltd (ASX: PNV) shares are once again among the most shorted shares on the ASX.

The latest data reveals that the medical device company has 8.8% of its shares held short.

Why are short sellers targeting PolyNovo shares?

There appear to be a number of reasons why short sellers have taken a big interest in PolyNovo's shares.

The first is the company's mixed performance over the last couple of years. Although its sales have been stronger in FY 2022, its performance in FY 2021 disappointed the market.

In response to its first half update from last year, Bell Potter commented:

Polynovo announced a relatively disappointing trading update, with 1H FY21 sales growth of 31% vs the pcp well below our forecasts, consensus and management expectations.

It is partly for this reason, much to the delight of short sellers, that PolyNovo shares are down 37% over the last 12 months.

What else?

A fund manager that has been shorting PolyNovo in the past is Regal Funds. At the Sohn Hearts and Minds investor conference in 2019, Regal named shorting PolyNovo as its pick. The fund manager revealed that it was targeting the company due to its belief that the biotech sector was "the biggest bubble in the Australian stockmarket."

Regal blamed the bubble on a lack of biotech expertise in the Australian investor community, which has led to them failing to value biotech companies properly. It commented:

We don't have the big pharmaceutical companies that North America and Europe have, and as a result Australians aren't that good at valuing drug companies.

While it is unclear if Regal continues to short PolyNovo shares, it's clear that there are still plenty of investors out there that agree with its view given the high level of short interest.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended POLYNOVO FPO. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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