Early on with the current fascination of special purpose acquisition companies, Clover Health (NASDAQ:CLOV) stock acted as an early warning radar system.
Right before we rang in the new year, CLOV stock closed up slightly above $17. However, the bullishness was short lived as far as SPACs were concerned as shares quickly tumbled.
Since the storyline has been covered multiple times, I won’t dive too much into the details.
Long story short, short-selling firm Hindenburg Research blasted CLOV stock, claiming that the underlying company failed to disclose that it was under investigation by the Department of Justice for improprieties such as kickbacks.
Later, disappointing results and guidance from its fourth quarter of 2020 earnings report confirmed to many investors that it was time to abandon ship.
CLOV stock gave SPACs a bad name. While this reverse-merger process allows retail investors to participate in the ground floor of initial public offerings, the nuances behind this setup may create poor deals for regular buyers.
I think it’s fair to say that most people who invest in companies based on fundamentals and not random social media posts took the downtrend as a sign to run for the exits. Of course, for those who follow social media, CLOV stock represented an opportunity.
That moment came in late May to early June. At first, Clover Health shares enjoyed some rumblings which could be chalked up to the law of small numbers. But a few sessions later, CLOV stock went vertical, closing at an all-time high of $22.15.
What happened? You guessed it, the short squeeze. It’s given back a bunch since and should open at about $13 today.
Now, onlookers are wondering what will happen next. Taking a quick look at the stats, the short percentage of float is 36.59%, which is incredibly high. If CLOV jumps higher from here, it wouldn’t be surprising.
CLOV Stock Could Just as Easily Disappoint
By now, it’s possible that even the most casual observer is familiar with what a short squeeze is. If not, the quick explanation is that this concept is financial judo, wherein you use short traders’ leverage against them.
To initiate a short position, a trader borrows stock, then immediately sells it. The goal is for the stock to drop as the trader must return those borrowed shares.
If all goes well, the trader buys back shares at a lower price, makes good on the loan contract, then profits from the difference. If the situation goes awry, the trader must buy back at a higher price; hence, the squeeze.
And that’s what happened with GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC).
The bears wanted to go after these two companies due to their supposedly poor business prospects during and after the pandemic. But just as in judo, the little guy can redirect a bigger opponent’s weight and use it against him.
But can the same tactic work for CLOV stock here on out? It’s possible but it’s hardly guaranteed.
While the short percent of float is extremely high, the short interest ratio or the days to cover is only one day.
To be fair, Yahoo Finance shows the short ratio as 2.34, but the bigger point is that it won’t take too long — based on average trading volume — for bears to close out their positions.
By no means am I an expert in short squeezing. But if one were to occur for CLOV stock, I’d imagine it would be short lived considering that there’s possibly enough room for the bears to wiggle out if push comes to shove.
Keep Your Emotions in Check
Another factor to keep in mind is that many times, the best trading opportunities happen because people were not expecting them.
Again, the best examples are GME and AMC. Unless you were part of the inside crew, who the heck knew that these stocks would jump like this?
But now that Wall Street professionals have wised up to the ruse, so to speak, they’ll be better prepared for it.
This doesn’t mean that there’s no chance that CLOV stock will move higher. It’s just that you’re less likely to catch people off guard. That’s why lightning rarely strikes twice in the market.
Finally, keep in mind that just because CLOV has high short interest does not mean that it will move higher. If it was that simple, everybody would just pull up short interest stats and wager accordingly.
That’s what has me most worried about CLOV stock. These kinds of parlor tricks usually have short lifespans.
On the date of publication, Josh Enomoto held a LONG position in GME and AMC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
