Recently, weight loss and diabetes watch company DexCom Inc. (NASDAQ: DXCM) stock plummeted by over 44% on a surprisingly bad quarterly earnings report. Management guided lower – much lower – than analysts had expected to see revenue and earnings per share (EPS), and it all had to do with the decreasing demand for the company’s medical devices, which are being replaced more and more by effective medicine lately.

Unfortunately, the crash in this company also brought down all stocks associated with weight loss and diabetes monitoring devices (and medicine). This is a perfect example of market irrationality; as earnings season kicks off, one company’s lower guidance becomes the expectation that all other similar companies will also report lower guidance.

This couldn’t be further from the truth, especially for a company like Hims & Hers Health Inc. (NYSE: HIMS), since that brand has only recently started operating in the weight loss arena, and definitely not through devices but instead through medicine. There are no other reasons for the stock to be on an 18.5% decline other than the wrong perception born off DexCom’s crash; here’s why this dip might not last.

Why Wall Street is Bullish on Hims Hers Stock

This company is not only part of the medical stocks group; it also combines the growth potential and advancements in the technology sector. The mix gives investors the best of both worlds: stability and growth in the face of one of the biggest market rotations in the cycle.

According to the employment situation report (NFP) for the month of July, a disappointing 114,000 jobs were added to the U.S. economy. However, what might interest Wall Street today is where most of these jobs went. Up to 64,000 jobs went straight to the healthcare sector—that’s 56.1% of the total.

Being in the middle of the hiring sprees that come with exposure to the healthcare sector, as well as the untapped growth potential coming from the technology aspect of the business, has led Wall Street analysts to forecast up to 90% earnings per share (EPS) growth for the company in the next 12 months.

This growth potential should be enough to support Hims Hers stock in the face of a double-digit selloff today. However, the main support today is found through price targets set by analysts at Bank of America, which now value the company at $26 a share.

To prove these targets right, Hims Hers stock must rally 49.4% from its current level. This is also why up to $260.2 million of institutional capital has entered the company, most of which came from a 1% boost in ownership by the Vanguard Group, which now has a $221.3 million stake in Hims Hers stock, or 6.7% ownership.

Market Sentiment on Hims Hers Stock

Wall Street is only half the picture for Hims Hers stock. The other half is found on Main Street since markets move the stock at the end of the day. Currently, sentiment has not been great for the company, as the stock’s short interest has risen by over 12.8% in the past month.

This means that many bearish traders have taken on their views of the company, shorting so much of the stock that the net percentage of shares shorted stands at 13.1% today. However, this could be good news in the coming months.

If or when the stock recovers, this considerable short interest could trigger a short squeeze, meaning these short sellers will need to buy back the stock they borrowed to close their positions. Buying pressure could act as additional upward momentum to crystalize how Wall Street analysts view the stock today.

More than that, investors can decrypt the stock market’s message regarding where Hims Hers stock should be trading. This is done through valuation multiple analysis, finding the positive outlier in the pack for a potential price move.

On a price-to-book (P/B) basis, Hims Hers stock does command a massive premium above the rest of the medical sector. A multiple of 11.5x will mean a premium of 139.5% above the medical sector’s average valuation of 4.8x today, and stocks always have a good reason to trade at valuation multiples.

One of these reasons is realizing that Hims Hers saw success before even tapping into the GLP-1 weight loss market. Whether there is any adverse effect on the industry, this company is poised to fill in the double-digit EPS growth picture with or without its weight loss business.

Source MarketBeat