The Healthcare Equipment Sector has been in rally mode over the last year, up 37%, including a 9% positive move over the last month. The sector rally received another boost with Varian Medical Systems (VAR) beating consensus EPS estimates handily, coming in at $1.06/share. VAR’s stock price surged 14% in mid-morning trading, hitting historical highs.
Short interest in the Healthcare Equipment Sector is $12.7 billion, increasing by over $583 million over the last week. Short sellers have been holding onto their short exposure in the sector during this year-long rally, but with VAR’s strong quarterly performance we may see some short bets coming off the table as short sellers in the top ten most shorted stocks in the sector are down $775 million in year-to-date mark-to-market losses. Most analysts have upgraded VAR’s rating and target price on today’s news with Goldman Sachs being the sole exception by dropping VAR’s rating to a sell.
If overall short interest in the sector does not decrease, traders may be looking for at least a temporary lull in the year-long rally and VAR’s positive performance a one-off outlier in the sector. A decline in short interest would signify sector short sellers rebalancing their positions in anticipation of continued earnings strength in the sector. With earnings season getting up to speed, we should see short interest increasing or decreasing.
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Managing Director Predictive Analytics, S3 Partners, LLC
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