Is Novavax, Inc. (NVAX) the 'Best Idea' For Contrarians?

Guggenheim dubbed Novavax, Inc. (NVAX) its "Best Idea"

Aug 26, 2016 at 2:34 PM
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Guggenheim named vaccine specialist Novavax, Inc. (NASDAQ:NVAX) its "Best Idea," while reiterating a "buy" opinion and a lofty $25 price target -- all-time-high territory. Specifically, the brokerage firm waxed optimistic on the firm's RSV vaccine, with trial data due out shortly. The news has the shares 3.2% higher at $7.09, though that's still a 72% discount to the brokerage firm's target. Below, we'll take a closer look at NVAX's technicals, as well as sentiment in the options pits and beyond, to determine just how good of an idea the stock really is -- particularly from a contrarian point of view.

As we just made clear, NVAX shares have caught fire today. More broadly speaking, the stock has been trekking higher since its most recent lows in mid-May, just above $4.25. Specifically, the equity has advanced 66% in just over three months, and has been consolidating atop its 50-week moving average since early July.

On the options front, short-term strikes appear to be en vogue this afternoon, considering the stock's 30-day at-the-money implied volatility touched an annual high of 174.4% out of the gate. In fact, intraday volume is running in the 89th percentile of its annual range, with calls and puts trading near parity. In recent weeks, though, calls have held a decisive advantage over puts among options buyers. NVAX's 10-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 2.97, with bullish bets roughly tripling bearish.

The analyst crowd is also extremely optimistic toward Novavax. Even putting Guggenheim aside, four brokerage firms rate the stock a "strong buy," compared to one "hold" and not a single "sell."

So far, there doesn't seem to be much of a contrarian angle on the shares. However, a look at short interest could help change that perception. In recent reporting periods, these bearish bets have been accumulating, and have reached nearly 65 million shares -- close to one-quarter of NVAX's float.

The implications of this data are twofold. For one, it suggests some of the aforementioned call buyers may not be bullish, but in fact, short sellers hedging. For another, it means there is ample sideline cash available on a potential short-squeeze situation. At Novavax, Inc.'s (NASDAQ:NVAX) average trading rate, it would take almost three weeks for shorts to cover their positions. So, if the trial data comes out as positive as Guggenheim's predicting, a rally in the shares could ramp up quickly, as unhedged bears scramble to limit their losses.

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