Chamath Palihapitiya. Picture: BLOOMBERG
Chamath Palihapitiya. Picture: BLOOMBERG

Clover Health, a health insurer backed by venture capitalist Chamath Palihapitiya, posted a second day of wild gains that appear to be driven by retail investors determined to punish short-sellers betting against it.

Clover rallied 74% in New York trading after briefly doubling. The gains erased five months of losses in the stock — which formed part of a broader sell-off in Palihapitiya-backed companies — in just two days. Trading volume in Clover was more than 25 times the three-month daily average on Tuesday, with a record 618-million shares changing hands.

The sudden flurry of demand comes after retail traders realised that short-sellers had been swelling their bets against Clover, a move that left them vulnerable if the stock were to start rallying. The stock’s story — like many retail plays — has left behind fundamentals with shares trading above $20, that’s more than twice the average analyst estimate.

On the Reddit forum WallStreetBets, chatter has built this week on the potential for a short-squeeze in the stock, after similar successful ploys on meme stocks including Workhorse Group and Richard Branson’s space exploration company Virgin Galactic Holdings, which advanced 17% and 6.9%, respectively.

Bearish bets in Clover have been steadily climbing since March and now stand at more than $580m or 44% of the public float, according to data from S3 Partners. Daytraders also touted the stock’s potential inclusion into the Russell indices — a rebalancing of those benchmarks is expected towards the end of June.

“Short sellers appear to be shorting into a rising market and overheated stocks, they are looking for a pullback off of these elevated levels,” said Ihor Dusaniwsky, S3’s MD of predictive analytics.

Short sellers were down about $465m on Tuesday’s move for a year-to-date loss of $517m, he said.

Clover declined to comment on the moves.

Other retail-trader favourites, such as AMC Entertainment and GameStop, see-sawed on Tuesday amid heavy volume. Wendy’s, the latest addition to the retail-trader frenzy, climbed to a record amid touts on Reddit.

“The power of the network effect of social media entices more people to get involved, so then they start broadening their horizons, looking for other names that have high short interest and things like that,” said Michael O’Rourke, chief market strategist at JonesTrading.

Bloomberg News. More stories like this are available on bloomberg.com

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