Earlier this year, ordinary investors on Reddit made a lot of headlines as they inspired a lot of people to buy shares in GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC). The run on the shares caused a massive short squeeze, and the two stocks skyrocketed in value almost overnight.
Now some home traders are trying to pull off a similar feat with a healthcare company, Clover Health (NASDAQ:CLOV). Will this stock zoom higher? Or will the share price crash and burn?
Corinne Cardina, bureau chief of Healthcare and Cannabis for The Motley Fool, and Taylor Carmichael, a writer at Fool.com, discuss the situation at Clover Health. This Fool Live segment was recorded on June 18.
Corinne Cardina: Clover Health is all of a sudden in the news. Why? Because of good old WallStreetBets [laughs] on Reddit. It’s been a while for them to move into the healthcare world. Obviously, it started with GameStop, then AMC, BlackBerry (NYSE:BB), all these. Why is Clover Health being talked about among Reddit investors?
Taylor Carmichael: Well, it’s interesting because we don’t really know, right? It’s a mob thing and you never know what the mob’s going to do next.
Corinne Cardina: Right, hysteria.
Taylor Carmichael: Yeah, it’s hard to predict. But I think the main reason is Clover, they have a high short interest. That was the reasoning behind the AMC and the GameStop is you have a high short interest, so if a bunch of people buy the stock, you crush the shorts, they’re squeezed, and they have to buy the stock. Or their brokers make them back the stock back, and that could make a stock run up. GameStop’s short interest, I believe, was over 100 percent. They had a super-high short interest, which is very easy to squeeze. This one is more I think 36, I’m doing it from memory, 36 percent of the float is sold short. It’s one of the highest that’s sold short, but that is not super-duper high, not like the GameStop situation.
Corinne Cardina: Right, but why is it being sold short?
Taylor Carmichael: Well, its being sold short, I think, because one, there’s a short report that came out, Hindenburg Research said the FDA is investigating them for marketing practices. I’m sorry, the SEC.
Corinne Cardina: The Department of Justice.
Taylor Carmichael: Department of Justice, thank you. It’s investigating them for marketing practices — back up little bit. Clover Health is an insurance company, but they’re trying a whole different model, they’re trying artificial intelligence to help doctors with their diagnosing. To me, it’s fascinating, this idea that computers are better at doing things than human beings are. I’m not sure I 100 percent agree with that. I think in some instances, it depends on how much you believe in data and data ruled decision-making. But this AI solution is all about that, so it’s all about letting doctors know what the data suggests that they should do and giving them the data, really. Clover’s also offering payment that’s twice what the market has been doing to healthcare providers.
Corinne Cardina: Right, but the short report is pointing to that and saying, “You all are paying providers, twice as much as the going rate.” and considering that this money comes from the government, when it’s Medicare, they’re calling that basically an alleged kickback. You all are doubling the going rate and it’s the government’s money, so it’ll be interesting to see how this shakes out definitely. This was a splashy SPAC when it went public, it was led by Chamath Palihapitiya, obviously, a big name in the investing world. He’s had to come out and defend Clover Health as a result. Now when Hindenburg published their short report, they actually said, “We’re not taking a short position in this stock, we’re just publishing this for the good of the world.” That’s a little bit of a head-scratcher. I don’t know if maybe they’ve taken a short stake later, but when they publish it, they were like, “We’re just doing it.” We’re not taking the short interest, they didn’t disclose a stake, so it’s a head-scratcher, for sure.
Taylor Carmichael: I don’t think of shorts as public interest people.
Corinne Cardina: Right, exactly. There’s got to be some motive.
Taylor Carmichael: You know, Corinne, I didn’t manage, I didn’t think about doing this — are they anonymous or do we know who’s behind Hindenburg research?
Corinne Cardina: Right. Obviously, when Citron comes out with the short, it’s Andrew Left. I don’t know who runs Hindenburg research. It’s not a new name. I Googled it and it says Nathan Anderson is the activist investor there. When it’s anonymous, that is definitely something to really squint your eyes at.
Taylor Carmichael: Sometimes they are completely anonymous, in which case, I’ve taken it with a huge grain of salt.
Corinne Cardina: Exactly.
Taylor Carmichael: You know, a public short, I believe they can keep their investments — as long as they’re not a publicly traded company — they can keep their investments private. So you don’t know if it’s the truth or not.
Corinne Cardina: Right.
Taylor Carmichael: Same as anybody else. To be fair, there are people on the bullish side of any stock who typically often have interest in what they’re saying. Any commentator on stocks who hold the position have that inherent bias. But at the Motley Fool, we believe it’s better to have skin in the game. If you own shares that creates a bias, sure, but it also makes your research a lot better because your money is involved and you want to be right. Skin in the game is good. I wouldn’t blame them for having a short. I’d ask, why aren’t you short? What the heck? You’re just saying they’re sketchy and bad, but you don’t want to make money from it? I don’t understand that.
Corinne Cardina: I guess long story short with Clover, it’s certainly gone up a lot since this renewed interest. There’s a lot of uncertainty, especially since the Department of Justice investigation is real, whether or not it’s common or really concerning is to be determined. But keep an eye on it if it’s one you own, we’ll definitely follow up when we learn more about the outcome of that.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.