Like many meme trades — or those with meme-ish qualities — Clover Health (NASDAQ:CLOV) has dazzled speculators with its wild volatility. Usually, mainstream investors don’t like massive swings in their portfolios due to the lack of predictability. But for believers in CLOV stock, it’s one of the reasons they’re wagering on the healthcare technology firm.
Step away from the derisive criticisms often directed against meme trades and you can appreciate why Clover has caught on like wildfire. You might even say there’s a romanticism to CLOV stock. As a speculative trade, it has arguably the most important attribute, kinesis. That is, by putting a large sum of money down, you could soon become a millionaire.
Maybe it’s coincidence, but I write this after watching the film Boiler Room, which is recommended viewing before anyone thinks about trading meme stocks. The counterpoint to the above thesis is that you could just as easily lose everything through irresponsible actions.
Beyond the popularity of CLOV stock on various social media platforms, it’s presumably difficult for most analysts to provide a sterling recommendation on the shares. For instance, our own Chris Markoch wrote that CLOV bulls “believe the Clover Assistant [the company’s personalized care network solution] is a better mousetrap… It’s a different mousetrap, for sure. But it’s not necessarily better.”
Further Markoch states:
However, there are other concerns. As I wrote in a previous article, “Medicare Advantage plans operate within a strict regulatory framework that places a limit on out-of-pocket costs in addition to capping service fees.”
This is creating a situation where the company is adding customers but continues to lose money. And they’re not necessarily outselling the competition either. The company has over 100,000 customers. However, it took them 10 years to get there. Other competitors have gotten much higher numbers, much faster.
In other words, don’t get too carried away with meme-based arguments.
CLOV Stock May Offer Fleeting Upside for the Daring
At the same time, there’s a small element of not throwing the baby out with the bathwater when it comes to CLOV stock. My colleague acknowledged this possibility, stating that, indeed, shares can bounce higher, mainly due to the high short interest.
Markoch discussed the short squeeze as a viable investing strategy (I’d call it a short-term trading tactic) in the new normal, opining “it’s about generating enough share price appreciation to cause bears to close their positions.” Frankly, you’d be crazy not to see the possibility of CLOV stock running higher on such a narrative given what we’ve already witnessed.
Also, Benzinga’s Melanie Schaffer brought up an interesting argument. Not only is the short interest high but CLOV stock features high ownership statistics. She wrote, “74.19% of Clover Health’s float is held by insiders and institutions, with insiders owning 15.43% of available shares and institutions owning 58.76%.”
The latter point is particularly interesting because traders often correlate institutional money as the “smart money.” So if the big boys are moving into CLOV stock, then it’s a smart move to follow them, right?
Certainly, in some cases, that does turn out to be the case. But the age-old question applies: is this causation or correlation?
Not to be the killjoy here but as Investopedia’s Caroline Banton writes, “There is little empirical evidence to support the notion that smart-money investments perform better than non-smart-money investments.” Indeed, Banton states that “Smart money was originally a gambling term that referred to the wagers made by gamblers with a track record of success.”
Further, you must appreciate that institutional investors usually have people to answer to. Therefore, if a trade goes awry, you’re not going to see these folks “diamond hands” their way to catastrophic losses. Nope, they’ll just coldly sell off.
Trade if You Must but Take Responsibility
That raises another concern about CLOV stock and its high institutional ownership. When the big money sells, they’re not selling a handful of shares. They’re jettisoning block after countless blocks of shares. Unlike the constant chatter about ballot dumps, these are the types of dumps that you see, feel and perhaps even smell.
Then again, there is definitely joy on the ride up. But if you follow the institutional players in CLOV stock, don’t cry if you then get played by them. You’ve got to know what you’re getting yourself into.
On the date of publication, Josh Enomoto 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.
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.