Squeezing the Shorts: Health Care Stocks

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By Jonas Elmerraji

BALTIMORE (TheStreet) -- While health care has been the hot topic on the news for the past few months, the industry certainly hasn't been an attractive industry for investors. The health care sector's valuation has jumped only 21.6% between the first and second quarters, compared with a 40% average jump across all industries.

The biggest reason for that underperformance is health care reform. Investors are nervous -- and rightfully so -- that new governmental regulations on the health care industry could make health stocks a tough sell. And while that makes health care stocks a scary place for investors hanging on until sentiment swings, it also makes select stocks excellent short-squeeze candidates.

A short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors. As more and more of the short investors buy shares to cover their positions, share prices skyrocket. Almost anything can trigger a short squeeze, including trumping earnings expectations, winning a lawsuit, unveiling a new product and even announcing a management change.

One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which divides shares short by average daily trading volume in order to get a ballpark estimate of the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.

With this in mind, Stockpickr has created a portfolio of health care stocks this week with high short interest ratios and the catalysts to trigger a squeeze. Here's a look at this week's potential plays.