Crowded short trades have been punished repeatedly over the past few months. From GameStop Corp. (GME, Financial) to AMC Entertainment Holdings Inc. (AMC, Financial), bearish investors have too often found themselves on the receiving end of a painful short squeeze.
The recent success of orchestrated short squeezes has put many traders and investors on the scent of similar opportunities. One such opportunity could be Clover Health Investments Corp. (CLOV, Financial). A number of traders have begun to point to the health insurance company's growing short interest as a perfect setup for another epic short squeeze.
Company overview
Clover Health is a health insurance company with domestic operations in Tennessee, California and New Jersey, as well as an international beachhead in Hong Kong. The company takes credit for pioneering "an entirely new approach to health insurance." This is how the company describes its unique approach:
"It all starts with our insurance model. We align with physicians by reducing doctor-insurer friction and increasing visibility into the health of each patient, leading to improved care. Our physicians are able to focus on people, not paperwork."
While a noble goal, Clover Health is hardly the only health insurer engaged in this sort of tech-enabled, physician-connected approach to care. However, that has not stopped it from enjoying a substantial market capitalization, which, even after having fallen 43% year to date, still stands at more than $3.5 billion. Despite posting a narrow loss in 2020, total revenue increased 45.6% year over year to $672.9 million.
Clover Health is clearly growing significantly, but its valuation appears to have gotten a little ahead of itself. That is hardly a recipe for an obvious short, especially under current market conditions, which have driven up valuation multiples in virtually every industry and sector.
Short interest in focus
On April 15, investor and self-described swing trader Matt Mindak highlighted Clover Health's growing short interest, arguing that it has set up the conditions for a massive short squeeze:
"CLOV has really become a sleeping giant...Look at the short interest. I never in a million years thought we would get here but here we are. I am patiently waiting for this epic short squeeze. Let the shorts pile in, they will be sent covering all the way up the ladder."
As of the April 15 close, the short interest in Clover had become one of the largest on the market. Such a large short interest makes for a potentially dangerously overcrowded trade – one that can draw the attention of predatory traders. Should such traders manage to orchestrate a short squeeze in the same vein as they did with GameStop and AMC, it could prove catastrophic to investors on the wrong side of the Clover Health trade.
There are some signs that an attempt to instigate a short squeeze is already underway. On April 16, shares surged nearly 30% intraday before retracing a bit. At time of writing, the stock was still up about 20% on the day. Should other traders scent blood in the proverbial market waters, the momentum could build. Given the intraday retrace, however, I would surmise that pressure toward a true short squeeze has yet to reach anything like critical mass.
My take
While Clover Health's fundamentals look questionable, the extreme volatility of short-side trades of late makes taking a short position in the name a bit unpalatable. Traders have proven more than willing to coordinate their efforts to blow out shorts in overcrowded names, as I discussed recently. The prospect of them doing so with Clover Health may not be massive, but it is sufficiently dangerous for me to recommend steering clear for now.
I advise investors on both sides of the trade in this name to move with extreme caution – and to pay very close attention to developments in the trading dynamics.
Disclosure: No positions.
Read more here:
- Can Short Sellers Survive in Today's Stock Market?
- A Ban on Short Sellers Would Hurt All Investors
- Tesla Is Struggling to Keep China's Consumers and Government Happy
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
