Clover Health falls almost 50% from its all time highs. Increasing short interest raises the question: Will a Clover Health short squeeze occur?
Why Clover Health Is Down 50%
Just under a year ago, a special acquisition company (SPAC) took Clover Health (NASDAQ: CLOV) public. The SPAC was led by Chamath Palihapitiya who continues to support Clover Health despite it’s weak stock price lately.
3 reasons contribute to Clover Health’s weak price action. The most obvious one is a short report from Hindenburg Research.
The short report claims that Chamath’s SPAC and Clover Health were not fully transparent with their investors. It expresses concern over the validity of several claims made by Clover Health and does not see Clover Health growing as they predict to.
Directly after the report, Clover Health fired back, disputing many of Hindenburg’s points and helped clarify uncertainty about themselves. You can read their response here. Investors remained wary, despite Clover’s short report rebuttal.
Next, SPACs, in general, have been hit hard these past few months. A rotation from growth stocks/SPACs into larger market caps has taken place. Clover Health is no exception to this transition.
Lastly, in March, Clover Health told its investors to expect 10,000 to 12,000 new Medicare Advantage enrolled clients by the end of 2021. While this might be a fair amount, many investors of Clover Health felt this number could be higher.
A multitude of factors contributed to the current downfall of Clover Health. The stock has been shorted since the Hindenburg Report and that short interest continues to increase.
A Clover Health Short Squeeze Possibility
Recently, there have been rumors and articles stating that Clover Health’s short interest exceeded 100%. If this were the case, it could turn into another Gamestop (NYSE: GME) situation very quickly. Gamestop was shorted 141% at one point and investors jumped on the opportunity to trigger a short squeeze.
With Clover Health, it’s much more likely that short interest is around 35% and the triple digit short interest is a misconception. However, this doesn’t completely rule out a short squeeze.
Clover Health’s free float is currently 109 million while their shares outstanding is 406 million. The majority of Clover Health’s shares are locked up by insiders and are unlocked after Clover Health sustains $30 for 90 days. To decrease the available float even more, we have to subtract institutional and longterm investors’ ownership.
Institutional ownership owns 48% of this free float and it’s safe to assume that most of them won’t sell during short-term fluctuations. We’ll give them the benefit of the doubt and say that 1/4 of them sell anyways (should a squeeze happen). In the end, this takes 35.5% out of the equation.
Next, we have to remember long-term investors of Clover Health have a portion of this float and won’t sell either. It’s guesswork with this number, but let’s lowball and say it’s about 18%. Now we have 53.5% of the available float out of the equation.
Clover Health’s Momentum
At this point, we are left with about 58 million shares available for trade. Volume for Clover Health on Friday when the stock price went up over 20% was 249 million shares. It’s safe to assume that there was a large amount trading Clover Health who chose to hold and do not plan on selling given the short squeeze rumors.
From Friday’s volume, we can assume new investors hold another 15-20%. Of course, at this point it’s all guesswork, but we are only trying to find whether a short squeeze is possible or not.
After including the 15-20%, this leaves about 29 million shares available. The short interest represents just short of 40 million shares.
Obviously, this isn’t to the degree of the Gamestop situation, but hypothetically, there’s more short interest than available shares. In order for a short squeeze to take place of massive proportions, available shares need to continue to decrease and short interest needs to rise.
Moreover, if short interest was 141%, a gargantuan squeeze would be much more likely. Right now, a squeeze of those proportions will not occur, but a squeeze is definitely still on the table. Shorts will need to cover their positions, especially if investors continue to gobble up shares.
What You Should Do
Overall, Clover Health stock has been completely beaten down. Though, the huge volume Friday shows that there is certainly buzz around Clover Health. This is not a situation where you want to go all-in, but there still could be money to be made.
If social sentiment continues to increase for Clover Health, the short interest could escalate. However, Wallstreet will still try to avoid being in the same position as the Gamestop situation. The chances are low, but a squeeze is not also out of the question.
Either way, Clover Health stock is still at a discount for the long-term. Chamath called Clover Health: “the greatest growth opportunity” that he’s ever seen.
Additionally, Clover Health recently announced some great news. The Center for Medicare and Medicaid Innovation announced that Clover would one of 53 direct contractors that will participate in Medicare and Medicaid’s Global and Professional Direct Contracting Model. Clover will see an increase in future revenue and clients as a result.
In conclusion, if you believe in Chamath and the underlying business, then Clover Health is a buy. Any momentum from a possible Clover Health short squeeze should be considered a bonus on top of your conviction.