Everyone wants to be part of the next GameStop, especially as there always seems to be a new target these days. Recently we had AMC, and now the Clover Health short squeeze.
And I get it. The “lucky” traders that got in early on GameStop Corp. (NYSE: GME) made a ton of money. But everyone else? They bought too high and got left holding the bag.
Now that Clover Health Investment Corp. (Nasdaq: CLOV) is the Reddit crowd’s latest darling, I feel a responsibility to my readers to talk about it. And to let you know that I don’t love the trade… even as the stock tanked on Wednesday.
Clover Health is both a Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO) with a Medicare contract.
It went public in January via a special purpose acquisition company (SPAC) deal. Its biggest backer is Social Capital CEO and venture capitalist Chamath Palihapitiya — the so-called “Pied Piper of SPACs.”
Which is one of the reasons I’m not a huge fan of the Clover Health short squeeze…
Palihapitiya has put himself into the public eye and tried to portray himself as a man of the people. He receives a lot of criticism for his politics and ideals — especially his criticism of venture capitalists while being one himself.
And while I do respect his entrepreneurialism and his publicly stated ideals, at the end of the day, he’s just trying to sell you something.
Not to mention… He clearly doesn’t respect leg day.
You’re welcome. pic.twitter.com/j9pGVEMLwd
— Chamath Palihapitiya (@chamath) February 3, 2021
It’s well-known that the members of the WallStreetBets subreddit like to target stocks they feel are unfairly shorted by hedge funds.
They saw the high short interest in GameStop and believed there was a future for the company — and the squeeze was on.
Then it happened again with AMC Entertainment Holdings Inc. (NYSE: AMC), among others, at the end of May.
Now, they feel that Clover Health is being unfairly shorted.
The stock was trading low, down from $13 a share in February to below $7 in May, after a report from Hindenburg Research accusing the company and Palihapitiya of hiding an investigation from the Department of Justice.
Although Clover has disputed those findings, shares still tumbled. Until this week at least.
The Reddit crowd noticed that 43.5% of the company’s float shares were sold short — compare that to 18% of AMC — and took advantage.
At one point during Tuesday’s trading session, the stock was up over 100% and saw a huge increase in trading volume. Prior to being targeted by retail traders, Clover’s daily trading volume was below 10 million.
Once those traders tried to create the Clover Health short squeeze, its trading volume jumped up to 700 million.
Then, as quickly as they came, the Reddit squad left, likely to move on to another stock. As I write this, shares are down over 20% from the open. Which I know, some less experienced traders will want to get in while shares are low and chase the squeeze.
And sure, there’s a chance it becomes the target of a short squeeze all over again. After all, the hedge funds didn’t learn their lesson the last time. They went back to shorting the same old stocks they were using as hedges during the first squeeze.
So, yes, you could try to get in now and hope for another squeeze to cash out on.
My thoughts? That’s a bad idea.
Because we trade smart… And what if another squeeze doesn’t happen? Then you’re left holding stock from a company whose future prospects I have serious doubts about.
And what’s more, the CLOV lock-up expires in a couple of weeks, which means executives can cash out their shares… So to me, short squeeze or no, Clover Health is a screaming “DO NOT BUY.”
All the best,
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