Talk of Clover Health (NASDAQ:CLOV) stock being a great short-squeeze play is making the rounds once again.
So, should you buy into the insuretech play now at around $8.50 per share, in anticipation of it zooming back to $20 per share and beyond?
Not so fast. It may still be one of the most talked-about stocks on Reddit’s r/WallStreetBets subreddit, but this may not translate into higher prices over the next few months for two reasons.
First, unlike some other “meme stocks,” this one is more dependent on the trend itself making a comeback.
Without this investing style coming fully back in vogue, the company’s weakening fundamentals could continue to hold it down. Other Reddit stocks, which have more going for them than just the “meme stock” catalyst, may have a greater chance of soaring. Whether or not the trend becomes popular again.
Second, uncertainty is rising that the stock market can overcome recent concerns, and avoid a correction, meltdown, or sell-off.
If such an event occurs, investors in stocks like this one, priced more on hype and hope than on fundamentals, could be in for a rude awakening.
Even if you’re confident that the “meme stock” trend isn’t over, stick to more promising plays in this category, and hold off buying this one.
CLOV Stock Will Flounder
Earlier this month, I said Clover could be one of the Reddit stocks that could bounce back if the “meme stocks” trend has runway. To some extent, I believe that’s still true.
If the trend overall makes a comeback, names still popular with the r/WSB community could have room to pop once again, but don’t expect CLOV stock to perform well in the near term if this trend doesn’t come back for another encore.
The red flags pointed out by Hindenburg Research earlier this year may be overblown. Department of Justice investigations sound concerning but are par for the course for Medicare Advantage plan providers such as this company.
Yet, there’s a larger issue that could hold Clover Health down: its weakening fundamentals. Wall Street analysts have been underwhelmed by its financial performance in recent quarters. Disappointment could continue, in terms of both its revenue growth, as well as the prospects of its eventual profitability.
In contrast, several of the other popular “meme stocks” may have room to bounce back. Even if the trend itself fails to make a comeback.
I’m talking about names like ContextLogic (NASDAQ:WISH), which could see growth re-acceleration starting in the next few fiscal quarters. Tilray (NASDAQ:TLRY), another name previously popular with Reddit traders, could make a comeback as well, thanks to catalysts that are company-specific rather than contingent on meme trends continuing.
If the stock market stays resilient, CLOV stock could merely underperform compared to its “meme stock” peers. But what happens if the markets correct, meltdown or there’s a sell-off within the next few months, look out below.
Hopes of it bouncing back via short-squeeze is the only thing helping keep the stock steady at today’s levels. If stocks across the board experience volatility and things shift from risk-on to risk-off, Clover shares could see declines that exceed those of the overall market. This is especially true because it lacks strong enough fundamentals to fall back on.
Sure, so far, signs that stocks are heading into “bear market mode” have been minimal. Even recent articles suggesting stocks are in a bubble make the concession that the popping of said bubble could be more like a gradual deflating, instead of an epic drop.
That may point to downside risk with CLOV stock being modest. Even so, it’s too early to say whether the market can ride out today’s concerns. Or if the Delta variant, inflation/interest rate worries, and a risk of economic growth slowing down will get the better of it.
Skip Out on Clover
The “meme stock” trend may have room for another encore. Clover’s popularity among retail investors alone may help it pop once again if this trend makes a comeback. But if it fails to do so expect this stock to underwhelm.
With its weakening fundamentals, it doesn’t have much to fall back on. In contrast, other popular r/WSB plays, like ContextLogic and Tilray, could have room to bounce back, whether or not the “meme stock” phenomenon has runway or not.
If markets fail to remain resilient, and start to move in the wrong direction? This stock, buoyed by factors unrelated to its fundamentals, like its short squeeze potential, could be in for outsized pullback in price.
Bottom line: skip out on CLOV stock, and stick with the Reddit favorites with stronger prospects.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.