The lackluster start to 2015 might be helping some shorts sellers turn a small profit, but a number of stocks still are screaming buys as they go against the grain of the market to trigger short squeezes. And as traders prepare for more declines, the data is showing even more short interest across the board.
Historically, high short interest can actually be a bullish indicator for stocks, whether the market is headed higher or lower.
One reason for this is that stocks with high short interest can be considered “pre-sold,” which means when a decline does occur on a stock with high short interest, typically fewer shares are being sold.
Another bullish side to short interest on a declining stock is that the sellers have to buy the shares back at some point to close their profitable positions, meaning there is a built-in bid on the stock whether it declines or moves higher.
The latest run of short interest data identified a number of healthcare stocks that are set up for short squeezes. This is significant because the healthcare sector has maintained its technical strength during the recent selloff, with the Health Care SPDR (ETF) (XLV) still trading above its key 50-day moving average.
Thus, right now, we like these three healthcare stocks to benefit as short sellers find they’re dead wrong about the trend in this booming industry.
Healthcare Stocks to Buy: Omega Healthcare Investors Inc (OHI)
This real estate investment trust manages a real estate portfolio that is focused on healthcare properties, especially long-term care facilities.
Business is good, as the company has beat earnings expectations all of the last eight quarters and just raised its dividend 1.9%.
The analyst community is starting to upgrade OHI shares; short sellers are on the wrong side of this stock. Watch for a volatile short squeeze to send OHI to $50.
Healthcare Stocks to Buy: Laboratory Corp. of America Holdings (LH)
Click to Enlarge As the name implies, Laboratory Corp. of America Holdings (LH) operates independent clinical laboratories around the world. The company offers blood chemistry analyses, urinalyses, blood cell counts and thyroid tests, among a bevy of other clinical services.
Business is good as LH has posted positive earnings surprises, which have led the stock to new highs.
The shorts are unconvinced — short interest has spiked 12% in the last report.
That’s good news for buyers, though, as a break above $117 should prompt a short squeeze that sends LH stock running toward our target of $140.
Healthcare Stocks to Buy: Quest Diagnostics Inc (DGX)
Click to Enlarge Another lab company, Quest Diagnostics Inc (DGX), is working its way into a healthier trend as earnings growth has been on the mend over the last year. Quest has integrated itself into the practitioner’s offices to provide testing services, which is paying dividends to revenue growth.
DGX will announce earnings on Jan. 29, and the short sellers are increasing their bearish bets ahead of that number. The recent 6% increase in short interest has sent DGX’s short interest ratio (aka days to cover short positions) to a whopping 11.8.
A break above $70 will slingshot this heavily shorted stock to $80 quickly.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.