The share prices of companies in in the healthcare sector have skyrocketed over the past year due to the heightened need for their products and services. However, some stocks were able to achieve price highs due solely to a short squeeze triggered by Reddit’s WallStreetBets (WSB) forum. For example, despite possessing weak financials, Clover Health (CLOV) and COMPASS Pathways (CMPS) witnessed solid gains thanks to the actions of WBS. Both stocks have lost some value lately, and we think that they do not have the potential to rebound. So, they are best avoided now.The entire healthcare sector, ranging from drugstores to biotech companies, strived to survive the COVID-19 pandemic by inventing vaccines and fulfilling urgent market demand for protection equipment and safe healthcare facilities, for example. And because several countries are now experiencing a resurgence of COVID-19 infections, the healthcare sector is expected to play a significant role this year again. In fact, the sector has immense potential to grow beyond this year thanks to technological advancements and a growing need for better healthcare products and facilities. The global healthcare IT market is projected to grow at a 14% CAGR over the next eight years.
Vanguard Health Care Index Fund ETF’s (VHT) 27.8% returns over the past year reflect significant investor interest in the sector. However, not all stocks in this space have gained because of a favorable industry backdrop. Reddit’s WallStreetBets (WSB)—which captured headlines thanks to its participants' huge success in squeezing short sellers out of their positions in GameStop (NYSE:GME) earlier this year—gamed weak players with high short interest in the healthcare space too.
But WBS favorites Clover Health Investments, Corp. (CLOV) and COMPASS Pathways plc (CMPS) have lost significant value lately and could witness further declines. Given their high valuations versus their financial strength, or lack thereof, we think that these stocks are best avoided now.