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Is the Clover Health share price heading to the moon?

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The Clover Health Investments (NASDAQ: CLOV) share price rose by as much as 109% on Tuesday, ending the day up 85%. The US health insurance firm is the latest meme stock to surge higher with the backing of retail traders.

While past performance is no guarantee of future gains, I can see several technical factors that could drive Clover’s share price higher in the coming days and weeks.

What’s special about CLOV?

Clover Health, a Medicare-backed health insurance provider, has seen its stock double since it went public in October 2020 in a $3.7bn deal.

The company’s latest earnings release showed sales rising by 21% to $200m during the first quarter, compared to the same period last year. Clover’s management expect the business to deliver revenue of around $820m in 2021 and said membership is on track to rise by between 17% and 21%.

However, Clover has already attracted some critics. In February, the shares fell sharply after short seller Hindenburg Research issued a critical report on the firm. Following the report, Clover issued a statement confirming it was under investigation by the US Securities and Exchange Commission (SEC).

I see this as a potential risk for investors over the medium term. But, right now, I think Clover Health’s problems could actually help to send the share price higher.

Short squeeze could lift Clover Health share price

One of the reasons retail traders are backing Clover Health shares is that the company has become heavily shorted. This means that investors — usually hedge funds — are betting that the stock will fall.

To short a stock, funds borrow shares from other investors and then sell them. They hope to be able to buy back the shares at a lower price later on, generating a profit.

When a stock that’s shorted starts to rise, then a short squeeze can take place. When short sellers see their losses getting larger, they start to buy back the shares they’ve borrowed.

This extra buying can often lift the share price. In turn, this causes more shorters to buy back stock, sending the share price even higher. That’s a short squeeze.

CLOV: heading to the moon?

Clover Health shares closed up by 85% on Tuesday. As I write this Wednesday morning, US pre-market pricing is suggesting Clover stock could open another 20% higher today.

In the short term, I think that market forces could send Clover stock higher — possibly a lot higher.

However, on a fundamental view, this stock already looks expensive to me. Clover’s market-cap of $9bn values the shares at 11 times 2021 forecast sales, even though the business isn’t expected to make a profit until at least 2023.

To consider investing in Clover, I’d need to do more research about the opportunity the company is targeting in the US health insurance market. I’d also want to understand short sellers’ concerns in more detail.

If investors start looking at fundamentals, rather than chasing trends, I think Clover Health stock could fall quickly and without much warning. The situation is too speculative for me, so I won’t be buying.

The post Is the Clover Health share price heading to the moon? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of Clover Health Investments. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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