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Feb 15, 2017

S3 BLACKLIGHT: Health Care Facilities Sector Recap – February 2017

The 2017 stock rally has painted the markets with a broad brush, the Russell 3000 is up 4.02% and every major sector is up 1.97% or better, except for the Energy Sector, which is down 2.66%. The S&P 1500 Health Care Facilities Sector has significantly outperformed the overall market in 2017 with a year to date return of 12.43%. Even with such high year to date returns, short interest in the Health Care Facilities Sector increased by $77 million in the last month, with a total short interest of $4.2 billion.

The top ten shorts in the sector make up the vast majority of its short interest with $3.8 billion of the $4.2 in total shorts. Trading was active in these stocks with short balances increasing $116 million in the last month.

On average, these top ten Hospital Facilities shorts outperformed the market in 2016 but are underperforming in 2017. These stocks averaged $2.8 billion in short interest in 2016 and made $844.7 million in mark to market net of financing P\L, for a return of 30.43%.

2017 is a disappointment for Healthcare Facilities short sellers. The average 2017 short interest of these top ten stocks is $3.6 billion, a year on year increase of 29%, but they lost $366.6 million in mark to market net of financing P\L, for a -10.20% return. Short sellers gave back 43% of their 2016 gains in less than two months in 2017.

Traders who increased their short positions in the sector in anticipation of the beginning of the dismantling of the Affordable Care Act, Obamacare, by the Trump administration may have acted too quickly. Although President Trump’s executive order to stop enforcing Obamacare’s individual mandate as well as other related regulatory statutes was quickly signed, its effects may be slow to materialize. If fewer patients are forced to carry mandatory healthcare hospitals will be forced to assume the cost of treating poorer patients who have few assets and no insurance. It may take over a year for the new administration to effectively repeal Obamacare, and in the meantime it may be business as usual for hospitals, acute care and managed care facilities. The rising Trump rally is lifting all stocks, but healthcare stocks may be enjoying the calm before the eventual storm.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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