A couple of years ago, talking to someone about a meme stock would have produced a rather puzzled look. It simply wasn’t a phrase that people knew. Fast forward to today, and hoards of retail investors are trying to find what will be the next meme stock. It relates to the surge in stock interest from internet chat sites and social media platforms. Clover Health Investments (NASDAQ:CLOV) shares rallied last week for this reason in particular.
What is Clover Health?
Putting aside the fuel from the army of those on internet chat sites, let’s consider Clover Health in the cold light of day. The company is a US-based Medicare plan provider. Its insurance is mostly for the Southern states, including South Carolina, Tennessee and Texas.
The business has performed well recently, which is one reason to support Clover Health shares moving higher. In the 2020 results that were released in March, total revenue grew 46% year-on-year.
It measures success via the membership numbers it has. On this metric, it had a membership of 58,056 as of the end of 2020, a 36.3% increase from 2019.
Indeed, the potential for further growth was one of the reasons that Clover Health shares can be traded today. Via a reverse merger with successful businessman Chamath Palihapitiya, the business went public last year. The vehicle (known as a SPAC) that was used to get Clover public is becoming increasingly popular for large investors who see value in other businesses.
Should I buy Clover Health shares?
So I’ve established that the company is well grounded and that Mr Palihapitiya saw enough value in it to take it public via a SPAC. How does the meme crowd get involved?
This is slightly harder to explain as there’s no set criteria for the type of stock that such retail investors go after. Some look at stocks that are heavily shorted. Shorting a stock is when an investor thinks the share price will fall. It involves borrowing the stock from a third party, selling it and then looking to buy it back at a lower price. But if the share price rises and the loss is high, the investor would have to buy back the stock and return it to whoever they borrowed it from. This bumps the price up even further.
As was seen with heavily shorted stocks like GameStop, pushing the price higher can trigger an even larger move as those who are ‘short’ have to buy back the stock.
What this meant for Clover Health shares was a move from around $9 at the start of June to a price of $15 now, with highs above $22 last week. Interestingly, last Tuesday, over $14bn worth of stock was traded, an amount larger than the market capitalisation of the company!
I personally wouldn’t buy Clover Health shares right now though. I see the rush to buy from the meme stock community as a negative. It’ll distort the fair price of the shares, making it hard for me to tell what the true value is. Volatility is also increasing, which is something I’d rather stay away from.
Don’t get me wrong, I do think the price could go higher from here in the short term. But this will be fuelled by speculation, and it’s not something I want to be involved in.