When short interest, or the amount of any specific stock sold short, starts to decline, that is usually a flashing sign for investors to take a look behind the curtain. In general, a lower short interest indicates an increased level of positive sentiment toward the stock, and vice-versa.
Short interest for health care technology and distribution stocks fell 5.5%, on average, in the second half of July. Short interest declined for clinical laboratories(14.5%), dental and veterinary companies (7.1%), death and waste services (5.1%) and pharmacy benefit management and retail pharmacies (2.1%). The analysts at Merrill Lynch think this decline bodes well for investors who buy the top stocks in their coverage universe now.
Catamaran Corp. (NASDAQ: CTRX) had a whopping 29% decline is short interest, which is extremely bullish. The company recently signed a 10-year deal with Cigna Corp. (NYSE: CI) to handle of the health care network’s pharmacy benefits management operations. Merrill Lynch has a $68 price target. The Thomson/First Call target price is $66.
Quest Diagnostics Inc. (NYSE: DGX) also had a massive 28.8% decline in short interest. Maxim Group also upgraded Quest as a stock to buy last week on the back of solid earnings. Merrill Lynch has posted a $67 price target, while the consensus number is at $61. Investors are paid a 2% dividend.
Steris Corp. (NYSE: STE) saw a large 18% decline in short interest. The company develops, manufactures and markets infection prevention, contamination control, microbial reduction and procedural support products and services for health care, pharmaceutical, scientific, research, industrial and governmental customers worldwide. The Merrill Lynch price target is $48, and the consensus target stands at $49.50. Investors are paid a 1.9% dividend.
CVS Caremark Corp. (NYSE: CVS) beat earnings estimates handily and has only 0.07% of its outstanding shares sold short, among the lowest in the Merrill Lynch coverage universe. Merrill Lynch has a $67 price target on this top pharmacy chain. The consensus target is set at $66. Investors are paid a 1.5% dividend.
McKesson Corp. (NYSE: MCK) has an even lower 0.06% of outstanding shares that are sold short. This top company delivers pharmaceuticals, medical supplies and health care information technologies to the health care industry primarily in the United States. It operates in two segments, McKesson Distribution Solutions and McKesson Technology Solutions. The McKesson Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products in North America. Merrill Lynch has a $130 price target for the stock, and the consensus target is $130.50. Shareholders are paid a small 0.8% dividend.
Service Corp. International (NYSE: SCI) has a very low 0.07% of its stock sold short. Short sellers may be savvy, but they appear to be loathe to bet against death. Service Corp. International provides death care products and services in North America and Germany. The company operates through two segments: Funeral and Cemetery. Its funeral service and cemetery operations comprise funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria and related businesses. The Merrill Lynch price target is at $22, the same as the consensus target. Investors are paid a 1.5% dividend.
Express Scripts Holding Co. (NASDAQ: ESRX) is on the U.S 1 list at Merrill Lynch, and the company was one of the few to see short interest increase. The Merrill Lynch team expects the latest short interest trends to reverse as it delivers on share repurchase expectations and mid- term growth drivers. The firm has a $74 price target on the stock. The consensus is at $74 also.
Falling short interest numbers do not always guarantee success. It does however, indicate that short sellers may not like the overall positive prospects for a given sector. In the case of anything in health care distribution and technology, they may be wise to move on. Despite the chatter and concern over the Affordable Care Act, or Obamacare, the sector is recession proof and the U.S population is aging. This will continue to drive demand.