Clover Health Investments (CLOV 4.29%) stock surged by as much as 104% on Tuesday after the company attracted the attention of the WallStreetBets subreddit as its next short squeeze candidate. The Chamath Palihapitiya-backed Medicare insurance technologist went public in January via a $3.7 billion merger with a special purpose acquisition company. As of 2 p.m. EDT, it was trading roughly 76% higher for the session.
The WallStreetBets investor forum, which focuses on stocks it believes are undervalued or have been unfairly targeted by short-sellers, now has more than 10 million participants, and it has been instrumental in creating "meme stocks" in recent months. Some of these have rallied to dizzying heights after hordes of retail investors piled into them in hopes of driving out and punishing the short-sellers.
When an investor believes a stock's price will decline, they can borrow shares of the stock in question, then immediately resell them to another buyer. If the stock price subsequently falls, the short-seller can then buy back shares at the lower price, return the borrowed shares, and immediately make a profit. On the other hand, if the stock rises, the short-seller will eventually have to buy back those shares at a higher price, and the trade will cost them money.
Clover Health's stock price has been under pressure in recent weeks after Hindenburg Research levied a short attack against the company. The short-seller charged, among other things, that the backers had misled investors into buying a company with a broken business model. The report also alleged that Clover Health was currently under investigation by the U.S. Department of Justice, something it failed to divulge to investors.
The percentage of Clover Health shares currently held short recently stood at 43.5%, making it an ideal candidate for a short squeeze. Roughly halfway through the trading day Tuesday, over 400 million shares of Clover Health had changed hands, 18 times greater than its 30-day average of 22 million shares.