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Top Health Care Short-Squeeze Plays

James Altucher

Health care stocks generally have underperformed most other sectors during the last year or two. This underperformance could offer an opportunity for short-squeeze plays from heavily shorted biotechnology, health facilities, pharmaceutical and medical equipment stocks.

A short squeeze takes place when a stock's short-sellers are forced to cover their positions quickly when the stock they are betting against starts climbing on positive news. As the short-sellers are forced to cover, the price of the stock often moves even higher.

The metric for measuring short-squeeze plays is the short ratio, which represents the number of days it would take a stock's short sellers to cover their positions based on the stock's recent average daily trading volume.

Stockpickr has compiled the Top Health Care Short-Squeeze Plays, a list of heavily shorted stocks in the sector that have the potential to climb higher on any positive catalyst.

One of the most heavily shorted health care-related stocks is HealthSouth Corp. (HLS Quote), an inpatient rehabilitation services provider with a short ratio of 40. In 2003, a fraud scheme sent shares plummeting. The company is slated to report its most recent quarterly results on May 7. The stock has a forward price-to-earnings (P/E) ratio of 33 and a P/E-to-growth (PEG) ratio of 6.6.

HealthSouth shares are owned by Highfields Capital Management, $8.3 billion hedge fund. Highfields also holds shares of Clear Channel Communications (CCU Quote), which has a 3 short ratio, Qualcomm (QCOM Quote), which has a 1.2 short ratio, and PNC Financial Services (PNC Quote), with a 3 short ratio.

Another stock with a significant short interest is Sciele Pharma (SCRX Quote), a cardiovascular and diabetes pharmaceutical company that has a short ratio of about 18. The company just announced that the Food and Drug Administration has accepted the new-drug application submitted by Addrenex Pharmaceuticals for CloniBID to treat hypertension. Sciele licensed CloniBID from Addrenex for the treatment of hypertension in June 2007. Sciele earlier this week launched a $100 million stock-buyback plan. Sciele has a forward P/E ratio of 8 and a PEG ratio of 0.5.

Sciele appears in the portfolio of the Stratton Small-Cap Value Fund, which is rated four stars by Morningstar. Stratton also holds shares of CommScope (CTV Quote), which has a short ratio of 4, Anixter International (AXE Quote), with a short ratio of 10, and Terex (TEX Quote), with a 2.4 short ratio.

Prestige Brands (PBH Quote) is another heavily shorted stock, with a short ratio of 21. This distributor of over-the-counter health-care drugs and personal products has scheduled its earnings call for May 15. The stock has a forward P/E ratio of 12 and a PEG ratio of 1.5.

Prestige stock is owned by Millennium Partners, a $5 billion New York hedge fund. Millennium also own shares of Altria (MO Quote), which has a short ratio of 0.9, NRG Energy (NRG Quote), with a 5.4 short ratio, and McKesson (MCK Quote), with a 2.6 short ratio.

For more heavily shorted stocks in the sector, check out the Top Health-Care Short-Squeeze Plays at Stockpickr.com.