This fundie shorted Polynovo (ASX:PNV) shares in 2019. Here’s how much he would have made

Was PolyNovo a good short idea?

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The PolyNovo Ltd (ASX: PNV) share price has been well and truly out of form in 2021.

Since the start of the year, the medical device company’s shares have fallen a massive 63.5%.

This makes the PolyNovo share price one of the worst performers on the All Ordinaries this year.

Short seller delight

While shareholders will be very disappointed with PolyNovo share price performance this year, short sellers will be licking their lips.

At the last count, approximately 7.6% of the company’s shares were held by short sellers. These are investors that profit if the PolyNovo share price declines, rather than when it appreciates in value.

One of those short sellers could be Regal Funds Management. A touch over two years ago, the specialist alternatives investment manager’s Chief Investment Officer, Phil King, named PolyNovo as his top short idea at the 2019 conference.

On the day, 22 November 2019, the PolyNovo share price was trading at $1.92. Things didn’t get off to a great start for the pick, with the company’s shares soon rocketing higher after its NovoSorb BTM product was granted a certificate of conformance (CE Mark) approval for sale throughout UK/Ireland and the European Union.

In fact, before being caught up in the COVID-19 crash in February 2020, the PolyNovo share price had risen 61% since being picked to $3.09.

Things then get better for short sellers before they get worse…

It remains unknown whether Regal Funds held on during this time and wore the paper losses. If it did, it would have been pleased to see the company’s shares fall to $1.54 during the early stage of the COVID-induced market volatility in March 2020.

If the short seller closed their position at that point, it would have meant a return of 20% less carrying costs. Though, that is hardly an achievement given that if you went short on almost anything in February, you would have made huge returns in March after the market meltdown.

Unfortunately for any short sellers that didn’t sell at that point, the PolyNovo share price eventually found its legs and started its ascent soon after. It even managed to reach as high as $4.08 by December 2020. This is 112% higher than the price it was trading at when picked as a short around a year earlier.

All’s well that ends well

The good news for Regal Funds, if it is still shorting PolyNovo, is that this year has been horrendous for the company. Weaker than expected sales growth and the surprise exit of its CEO have all weighed heavily on the PolyNovo share price.

This has left it trading at $1.44 today, which is 25% lower than when nominated as a short pick. Though, after factoring in the carrying costs, one wonders whether it would have been worth all that volatility.

Should you invest $1,000 in PolyNovo right now?

Before you consider PolyNovo, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and PolyNovo wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

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. owns and has recommended POLYNOVO FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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