Moderna Stock Continues to Rise & Prove Doubters Wrong

Moderna Stock Shorts Could Actually Be Good

When a stock gets hot and juicy, it draws the wolves, traders looking to make a buck by short-selling what they believe is a company riding the hype train.

Sure, sometimes the wolves are right, predicting major collapses and reaping the rewards of their foresight. Other times, they suffer immense losses after their negative prognostications turn out to be anything but correct. And that’s what has happened with Moderna Inc (NASDAQ:MRNA).

Moderna stock is among the biggest surprise top stocks of 2020. Which, to be fair, isn’t saying a lot. 2020 has been full of surprises—mainly ones we didn’t want, but at least it’s not boring. May you live in interesting times, as the old curse goes.

But interesting times are also ripe for exploitation. In this case, MRNA stock has turned many investors’ portfolios around single-handedly amid so much market chaos.

Regular readers of Profit Confidential may remember that I began writing about Moderna stock at the end of February. Since then, MRNA stock has seen gains approaching 275%.

Chart courtesy of StockCharts.com

Moderna stock is one of my top stocks of 2020, not in spite of COVID-19, but because of it. The company is among the front runners developing a vaccine to combat the virus.

In a vote of confidence, the U.S. federal government infused Moderna Inc with $483.0 million in an attempt to help develop said vaccine, and it has even begun working with Moderna in-house to develop it. (Source: “Moderna Soars After $483 Million Covid-19 Agreement With U.S.,” Bloomberg, April 16, 2020.)

While the government money is of course nice, having the government scientists on board has caused some friction between Moderna employees and the government experts.

Trouble aside, MRNA stock recently spiked again after the company revealed that is had complete enrolment for a Phase 2 trial of the COVID-19 vaccine. (Source: “Coronavirus Vaccine Progress: Moderna Partners for Manufacturing Deal, More Trials to Start Soon,” Boston Herald, July 11, 2020.)

Moderna Inc’s next step involves a Phase 3 study based on feedback from the Food and Drug Administration (FDA). This phase, which was expected to include 30,000 participants, was planned to start sometime in July.

What’s more, Moderna has partnered with European pharmaceutical company Laboratorios Farmaceuticos ROVI SA (BME:ROVI), which will provide vial-filling and packaging capacity for the vaccine at a facility in Madrid. (Source: Ibid).

So all this is indisputably good for Moderna stock. I remain a staunch supporter of this stock, so long as the company remains out front in the COVID-19 vaccine race.

But there are many traders who believe that Moderna Inc is fool’s good. Many of those doubters, however, have been kicking themselves for believing that. Short-sellers of MRNA stock have lost about $1.5 billion in 2020. (Source: “Moderna’s 370% rally has cost short sellers US$1.5 billion in 2020,” BNN Bloomberg, July 17, 2020.)

Despite that loss, about 10% of Moderna stock remains sold short.

Usually, when a company has a large portion of its outstanding shares sold short, it means there are a lot of question marks surrounding the company. To be fair, there are several important ones hovering over Moderna Inc, the company’s inexperience being one of them.

Stocks that soar high, after all, are the most vulnerable to a sudden fall, and therefore short-sellers are willing to risk big losses for that chance.

But it doesn’t appear they’re going to get their wish. In fact, they may actually end up leaving en masse in what’s called a short squeeze. If that happens, then MRNA stock is only going to climb higher.

What MRNA Stock Holders Need to Know About Shorting

The thing about short-selling is that it more often than not trails companies that are in the news and whose shares are rising fast based on promised projections.

Tesla Inc (NASDAQ:TSLA) is a perfect example of a company with a huge short position against it (and one that has made many of those short-sellers regret their move, especially in recent months).

Still, it’s generally seen as a negative to have so many people convinced that a stock is bound to sink.

Again, that’s often a curse of a stock’s success: rocket-powered rises followed by equally speedy falls. Corrections. Market pullbacks. Any number of scenarios that result in a huge exit from a stock could see short-sellers handsomely rewarded for their pessimism.

But there’s a flip side: short-sellers who bet wrong often end up, ironically, powering the stock in question to new heights. This is what’s called a short squeeze: short-sellers leaving all at once to avoid further losses, selling their shares on the upward end of a wave, leading to the price climbing further.

It’s something that has happened with Tesla stock, and something that may very well happen with Moderna stock, especially if the results of the company’s latest vaccine trials are as positive as we’re anticipating.

So all this is to say that MRNA stock looks to be in a powerful position, and that a massive outstanding short on a stock is not necessarily a bad thing.

While it does mean the stock is more likely (at least in the eyes of many) to see volatility, it also typically means that rapid growth attracted these short-sellers in the first place.

So don’t be afraid of a high number of short positions in any stock, but especially not in Moderna stock.

While it doesn’t mean that MRNA stock is guaranteed to go up, just because there’s a sizable minority of doubters shouldn’t necessarily influence your investment portfolio. If you had listened to these folks in the case of Moderna Inc, you’d not only have missed out on a big opportunity for profits, but you’d be in the hole yourself.

Analyst Take

Moderna stock remains one of my top stocks of 2020 for one reason. The company is attempting to answer the biggest—if not the  only—question on everyone’s mind this year: when will the COVID-19 crisis end?

Yes, there are many, many issues that need to be sorted out (as evidenced by the current political state of the U.S., and the world more broadly). But all of them will be on hold to a degree until we can reassert some manner of normalcy in our day-to-day lives.

In the old supply-and-demand formula, we have an enormous demand for a COVID-19 vaccine and no supply at the moment. As you’d expect, if Moderna Inc is the first to field that supply, then MRNA stock will rise accordingly.

But that puts a lot of pressure on the company’s back, and there are some who believe it will be unable to deliver. Or that it’s all hype. Or that, even if the Moderna does deliver, it will be later than people expect and therefore will hurt the company’s share price.

While those are perfectly valid concerns, up until this point, they’ve all been unproven (if not outright disproved).

So while you may see short-sellers assembling at the gates and get a little antsy, it’s not worth losing sleep. Instead, treat it as a sign that Moderna stock is gaining recognition and attention, which in turn could lead to big gains down the line. While that is not always the case, it does appear to be the situation with MRNA stock.