It’s still being talked about heavily on Reddit’s r/WallStreetBets subreddit, but other than news of its CFO stepping down, little has changed lately with Clover (NASDAQ:CLOV) stock.
Some investors, even those burned by its return to single-digit prices, may still be holding onto their positions. Mostly on the hopes the “meme stock” trend makes a comeback, and hype again sets in to drive in this insurance company that seeks to “disrupt” the Medicare Advantage plan business.
Yet, as of now, it’s questionable whether a third wave of “meme stock madness” is on the horizon. After the first wave in February(and the second wave two months ago?), retail traders may have given up trying to profit from this phenomenon.
Looking at Clover through the lens of market psychology, another turbo-charged rally makes sense. Still heavily shorted, it would easily go back “to the moon” if enthusiasm returned with full force.
But if you look at things from the view of the stock’s fundamentals, there’s a good reason why the short side of this trade remains crowded.
The trends that burned them in 2020 and in the first half of 2021 are fading. As the trading environment goes back in their favor, there’s little to gain from diving into this stock. Even as it seemingly has found a floor at around $8 per share.
CLOV Stock: Why Another Squeeze Isn’t The Cards
Recent headlines suggest that the meme stock craze is fading, and isn’t coming back.
The above-mentioned r/WallStreetBets subreddit may still be seeing plenty of chatter about the names that traded wildly earlier this year, but with few new novice traders joining the fray, it doesn’t look likely we’ll see a return to the high-energy that sent Reddit stocks “to the moon” during the two short-lived waves earlier this year.
Shares remain heavily shorted, yet that’s only one part of the equation. To get squeezed back to $15 per share, or even back to $20 per share, traders active online need to drum up sufficient enthusiasm. With fewer and fewer new participants hopping on the bandwagon, the chances of this happening are slim.
Putting it simply, that’s bad news for investors long Clover today. The short squeeze angle is the only thing going for it right now.
There’s little company-specific that can re-inspire confidence. In fact, if you look at its fundamentals, it’s clear the short-side is on the money when it comes to betting against this stock.
Valuation is still high relative to possible growth. It’s still debatable whether this would-be “disruptor” will ever achieve profitability. A business that may have sounded like a winner on paper, but an early-stage company that will ultimately fail to “make it to prime time,” as I like to describe when a startup becomes an established business.
The Shorts Are Barking up the Right Tree
The past year has been a minefield for short-sellers. Under typical market conditions, shorting overvalued stocks with weak business models can be highly profitable.
After the start of the “Robinhood stocks” phenomenon, which morphed into the Reddit stocks phenomenon, though, short-selling became a difficult way to make a profit.
Yet, the “new normal” of stocks trading little on fundamentals may be coming to a close. As we return to the “old normal” when it comes to investing, where fundamentals and valuation are top factors for price action, short-selling could become a winning strategy once again.
In the case of this stock, it’s clear the shorts see this happening and therefore are staying the course by retaining their positions.
CLOV stock may have been able to be one of the hottest names around when hype and momentum was the name of the game, but as the weakness of its underlying business becomes top of mind again, the shorts are barking up the right tree betting against this flea-bitten dog of a stock.
As InvestorPlace commentators Josh Enomoto and Muslim Farooque have both recently made the case, there’s a big risk its business model fails to ever achieve profitability.
Even high levels of revenue growth look questionable at this point. The much-discussed “short report” released by Hindenburg Research earlier this year takes a deep dive into a major risk still on the table: the Department of Justice investigation of its business practices.
CLOV Trends Are No Longer Your Friend
Trader enthusiasm failing to come back is bad news for short-squeeze plays. Especially short-squeeze plays that don’t have strong enough fundamentals to fall back on, like CLOV.
There’s a reason why CLOV stock has been shorted heavily. With trading trends no longer your friend, there’s little reason to dive in today.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
