In case you missed it, there is an amazing shift in investor mentality going on. And Clover Health (NASDAQ:CLOV) stock is one of the stars of this incredible show unfolding on Wall Street.
This happened blindingly fast, largely due to the new breed of investors that the pandemic created. Billions were out of work and a large portion of them took to the markets. Add a giant dose of government stimulus and you get very eager investors chasing the quick buck.
Main Street investors turned CLOV stock into a dizzying roller coaster ride. The company is not new, it’s seven years old. However, it recently became public through a back-door strategy involving a special purpose acquisition company (SPAC). It quickly gained notoriety because of its intermingling with billionaire investor Chamath Palihapitiya. It merged with his blank-check Social Capital Hedosophia company to come public.
SPACs are a quick way of coming to market and avoid the IPO song and dance. The drawback is that they bypass the vetting process that would uncover flaws. In this case, that process would have helped Clover Health avoid the scrutiny it now has from its critics.
Clover Health is a legitimate business and it deserves better respect. Hating it just because it is a SPAC is wrong.
Nothing Has Changed Since April
Today I will reiterate the message I had late April. I still stand by my conclusion that, in the long term, this is a viable business. Owning CLOV stock for the long haul is a valid bullish thesis. The short-term whipsaws won’t matter much for patient investors. However, the price action has been so wild that it’s hard to ignore.
In April, I mentioned that selling it under $7 per share was wrong. Those who acted on that and bought it in May had the opportunity to book 300% in a week. As they say, easy come easy go, and the super spike reverted back to the breakout neckline. The timing of my article back then couldn’t have been more perfect. It served as the pivot price point for CLOV on June 21.
Fundamentally, the financial metrics are still too new to serve as a decision-making argument. Therefore, I will lean on simple logic, then marry it with my technical knowledge of charts.
It is reasonable to expect that management will continue to execute well going forward. So far they’ve done well signing up states. That fact alone gives me comfort that I can leverage.
I’m all about doing homework, but if somebody’s done it already I will use it. My assumption is that government officials would know if it was a sham. This is good enough fundamental backing for my taste.
CLOV Stock Is a Worthy Long-Term Risk
Next I draw on my understanding of CLOV stock price action. It is currently falling into the June 21 neckline zone. They’re not usually hard lines but they are reliable. There will be buyers lurking as it approaches $10 per share. As for those who are long already and haven’t capitulated yet, it’s too late to panic.
Investors who are looking to get long now have good reason to initiate positions. Going all in is wrong, however, because there are reasons for concern from outside factors. The entire stock market is setting records, as we head into a diminishing stimulus situation. The Federal Reserve has already signaled policymakers are closer to tapering than their 2023 target. If that happens, there will be a void in the demand for stocks.
The fall from this altitude for equities is going to be epic. I’m not condoning shorting it, but up here it’s worth being cautious on all stocks. If the indices correct, they will drag down the good and the bad ones. Clover health does not trade in a vacuum, it has to go with the flow.
The macroeconomic conditions are too strong. The government may have done too much to spruce up the economy after the shutdown. For now, the bulls are still in control and they are buying dips. Clover Health is a quality stock to buy on the dips in a bullish environment.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.