Shares of Tenet Healthcare (NYSE:THC) jumped 9.7% on Wednesday after rising 19% on Tuesday, bringing the two-day total return to nearly 29% for the hospital operator.
It's tempting to think that today's run is because investors are still digging the hospital's first-quarter results released yesterday. And that's certainly possible. The company beat analyst expectations on both the revenue and earnings side and raised 2018 earnings guidance. There's a lot to love.
But the first-quarter results and guidance should have theoretically been factored into the valuation set yesterday. Today's move likely has more to do with short sellers exiting their positions after yesterday's run up, which requires them to buy shares to close their shorts, resulting in a short squeeze where there are more buyers looking to purchase shares than sellers at the current price. As of the last update, there were 18.6 million shares, or 18.8% of Tenet's float, that were shorted.
Short squeezes are a vicious cycle where higher prices result in more short sellers needing to exit their positions, resulting in even higher prices. But at some point, enough of the short sellers have exited their positions that the buyers and sellers come into equilibrium. And because the new buyers don't necessarily have to buy right now, the share price often drops after a short squeeze.
Long-term investors confident in Tenet's ability to prosper in the face of a seemingly ever-changing healthcare system -- an arduous task for sure -- can ignore the short squeeze and possibly the forthcoming decline. Short-term moves are only paper gains and losses.
Investors looking to get into Tenet after the solid first quarter results might be best off waiting to see where the dust settles rather than following the momentum. Eventually all companies trade on their fundamentals.