Clover Health (NASDAQ:CLOV) stock is a lightning rod. The disruptive health insurance company has been plagued by controversy all year and saw its shares tumble from $15 to $7. It trades today at a little more than $9.
However, the stock has surged once again in recent weeks on far-above-average trading volume.
The comeback isn’t due to a big turnaround in Clover’s business prospects, at least not yet. Rather, traders have gravitated to CLOV stock on hopes of an epic short squeeze. These hopes have been partially met; Clover shares have rebounded to $11 as of this writing.
However, the squeeze hasn’t quite lived up to the excitement we saw out of r/WallStreetBets earlier this year. What’s going on with CLOV stock and is it set for a continued social media-fueled surge? Read on.
The Short Squeeze Begins
The excitement all kicked off with a Benzinga post. It highlighted eight of the most shorted stocks in the market and listed Clover at number one.
For this post, Benzinga sourced its numbers from S3 Partners. According to those numbers, a stunning 144.7% of CLOV stock’s float had been shorted. That was way ahead of the next most-shorted company, PubMatic (NASDAQ:PUBM) which was only 50% shorted.
Benzinga’s staff writer specifically compared Clover’s apparent 145% short float position to the famous short squeeze over at GameStop (NYSE:GME).
GameStop was the most shorted stock on U.S. exchanges when it blasted off in January and was above 100% of the short float at one point. Thus, you can see how folks would draw a similar parallel for CLOV with its apparently sky-high short interest.
Soon, activity lit up on social media sites such as Reddit. Traders gravitated to Clover as the next GameStop-style market-breaking short squeeze.
Following the Benzinga post, trading activity spiked to as high as 40x CLOV stock’s normal daily turnover. Just as Ryan Cohen and Keith Gill aka Roaring Kitty were inspiration figures for the GME stock squeeze, traders looked to Chamath Palihapitiya to vanquish the short sellers in CLOV stock.
There was, however, a key problem with this theory.
If you go back and read that Benzinga post today, it has been changed. Benzinga’s note reads as follows: “On April 19, S3 followed up suggesting Clover’s actual short percent of float is 36.9% based on an ‘updated’ float number from FactSet.”
It seems as if either S3 or FactSet had made some erroneous calculations here.
A prominent anonymous Twitter member, Keubiko, offered a detailed analysis of how the errant number came to be. In a post bluntly titled “Clover Health Is Not The Next GameStop,” Keubiko drilled down on the math.
It turns out that S3 had excluded the CEO’s shares from the calculations, leading to the mistake. S3 subsequently updated its data and put the new short interest figure at 37%, but by then, the cat was out the bag.
Reddit users continued to come up with their own tabulations, suggesting that the stock was still really more than 100% shorted.
As Keubiko highlighted, however, these subsequent calculations contained other mistakes, such as double-counting shares held by Palihapitiya. With the passage of time, data operators have reached the correct statistics.
Most financial sites now show CLOV stock having a short interest in the 30-40% of float range, as opposed to the previous overstated figures.
CLOV Stock Verdict
The basis of the initial short squeeze was erroneous. Factset’s data was off, and Benzinga and others amplified that faulty statistic until it took on a life of its own. If traders had known that Clover’s real short interest was around 35% instead of more than 100%, it’s doubtful CLOV stock would have exploded in the first place.
That said, pointing out that the short interest is “only” 35% doesn’t make quite as bearish an argument as it sounds. After all, 35% is still a whole ton of short interest. Even if it’s well shy of what was originally reported, 35% short interest definitely puts a stock in the spotlight for possible short squeezes.
From a broader perspective, it’s rarely a good idea to invest in a stock simply because you’re hoping for a short squeeze. Clover’s long-term fundamentals will determine where the stock goes in future months. The company has come under some fire for things such as not promptly disclosing a Department of Justice injury.
As far as the short squeeze narrative goes, however, both sides have a good point. CLOV stock probably isn’t the next GameStop. However, short-sellers have a large position in Clover nonetheless, and that sets the stage for more volatile trading going forward.
On the date of publication, Ian Bezek held a bullish position in GME stock via July $20 strike GME naked puts. He had no position in CLOV stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.