Short Interest Alone Should Keep You Interested in Clover Health

By all measures, Clover Health (NASDAQ:CLOV) is having a rough time. Shares have lost roughly 32% of their value in the past month as retail investors on Reddit have set their sights on other targets. But is now the right time to bail on CLOV stock? If you’ve been following the mania this year, there’s no way you’ll want to leave this one. Clover has a short interest of 27.8% as of this writing.

A close-up shot of a hand choosing wooden blocks with emoticons on little wooden tiles symbolizing types of health insurance
Source: Shutterstock

Opinions vary, but short interest above 20% is exceptionally high. This metric matters a lot if you are in the world of Reddit investing. Generally, extremely high short interest shows that investors are very pessimistic about a particular stock. But not in every case.

Reddit’s r/WallStreetBets has repeatedly led targeted buying campaigns in a handful of heavily shorted stocks. They’ve churned out viral stock memes and regularly generated massive short squeezes.

In this context, it does not matter what the financials say. Even if the company is a non-starter, Reddit traders will still pile on, sending the stock “to the moon.” But when you look at Clover Health, it’s also not all doom and gloom. In fact, there are several areas where its product and services can contribute heavily. Yet, at a market cap of $3.36 billion today, that potential is already priced in.

CLOV Stock Needs More Catalysts

Clover Health reported first-quarter earnings back in May — and it’s safe to say the numbers left everyone a bit disappointed. True, total revenue was $200.3 million in Q1 2021, a 21% increase compared to $165.5 million in 2020. However, the startup insurer suffered a $48.4 million loss, nearly doubling its year-over-year (YOY) losses as medical costs jumped under the pandemic.

What’s more, Clover’s medical care ratio ballooned to 107.6%, compared to 89.4% in Q1 2020. And this metric is a key one in the health insurance industry, measuring the percentage of premiums paid out in claims rather than expenses and profit provision. As a rule of thumb, a ratio of 85% or less is desirable. Clover executives say they believe theirs is usually higher than competitors’ due to the company’s benefit offerings and lower out-of-pocket costs for members.

Granted, no one was expecting Apple (NASDAQ:AAPL) numbers here. But still, the markets were disappointed by the largely pedestrian performance from a company looking to revolutionize the health sector. On the results, JPMorgan analyst Lisa Gill — who cut her price target on CLOV stock to $9 from $15 — said in a research note that Clover Health “lowered most guidance metrics, including reducing the number of aligned beneficiaries under the direct contracting program in 2021 by 50%.” Gill continued:

“CLOV aims to use its proprietary Clover Assistant point-of-care physician clinical management software to simultaneously deliver superior member benefits and industry-leading profitability […] Whether this ‘thesis’ can prevail will face an extreme test as CLOV expands exponentially.”

But will the Reddit crowd take notice when it comes to CLOV stock?

Short-Term Prospects

This company is one of many SPAC-related (special purpose acquisition company) deals involving billionaire investor Chamath Palihapitiya. But after its blockbuster debut, Clover has struggled. This particularly became the case following a short-seller report from Hindenburg Research that attacked both CLOV and Chamath in equal measure back in February.

That said, the high short interest still makes Clover an ideal target for retail traders who want to cause a short squeeze.

For this reason, I believe CLOV stock will continue to reward shareholders in the short run. True, the stimulus money is evaporating and that will have a massive impact on Reddit-induced spikes. But Redditors have also had several wins. Their savings will continue to play a huge part in the future of the stock market.

All in all, I would be wary of betting against this enthusiastic group.

CLOV Stock: A Tale of Two Traders

When thinking of investing in CLOV stock, you need to decide which approach suits you.

The first route you can take is short-term retail trading. If that’s your game, go ahead and buy it because this one is highly shorted. But if you’re a value investor with a long-term perspective? Well, Clover still has a lot to do.

Clover Health’s low-cost approach to administering Medicare plans is interesting. However, before the company can deliver on the hype that management is offering, more work needs to be done on its operating model.

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On the date of publication, Faizan Farooque 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.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.


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