The retail investors that sent an insurtech's stock soaring

Stock market

The ‘meme stock’ phenomenon that began in January when the share price of American video game retailer Gamestop was sent soaring by non-professional investors corralling on internet forum Reddit reached the world of insurance last month. Harry Curtis looks at what impact it had.

In June, Clover Health – a US health insurtech – joined the likes of Gamestop, cinema chain AMC and Blackberry on the list of companies that have captured the imagination of large internet amateur investor communities.

The growth of those communities themselves is in large part an outgrowth of the Covid-19 pandemic.

“A lot of people's finances are being supported by governments, which means that people have some disposable cash,” explained Giles Coghlan, a financial markets commentator and chief currency analyst at foreign exchange broker HYCM.

“Combined with that, the acceleration of digitalisation means some people are working at home and their work patterns have changed.

“This has meant that focus on the stock market has been able to really blossom, and meme stocks are a particular group of stocks that attract certain investors, maybe even new investors, particularly from social media sites like Reddit or Twitter, and have dramatic price increases."

Coghlan added that the dramatic increases seen earlier in the year were often counter-intuitive to what the fundamentals of the stocks might have dictated.

The rhyme and reason behind the increases lies in what other investors are doing. Coghlan continued: “They're often stocks that have some of their float sold short. Some investors are looking for particular stocks that are being heavily shorted by professional investors.”

This was true of companies like Gamestop. “When [non-professional investors] found out that these stocks were being heavily shorted by some professional investment firms, there was an idea that maybe they could force the big guys out of the situation,” Coghlan said.

“Particularly with Gamestop and AMC, there was a desire to force what's called a short squeeze, which is where investors are forced to buy back stocks that they've sold, and they literally get squeezed out and that forces the stock higher.”

In the case of Gamestop, hedge funds lost billions as they sought to cover the positions they had taken on the stop.

An adversarial attitude from meme stock investors towards hedge funds – often derisively called “hedgies” – persists on Reddit forums and in the comment sections of market news sites.

Clover

US health insurtech Clover Health saw its share price spike in early June, rising from $9 (£7) at the close of trading on Friday 4 June to a high water mark of over $23 when trading opened the following Wednesday.

Its rally was checked somewhat as the week went on after analysts at Bank of America downgraded the stock from neutral to underperform on Thursday 10 June, and it closed the week with a price of $15 and a market capitalisation north of $5bn.

On the 9 and 10 June, Clover announced it had signed agreements with healthcare providers in a number of states. But these announcements came after the major increases in its stock price on 7 and 8 June, which are better explained by an explosion in the interest the stock was garnering on sites like Reddit.

On these two days Swaggystocks, a website that scrapes mentions of stock tickers from social media sites in order to analyse investor sentiment, registered a surge in mentions of Clover on Reddit’s Wall Street Bets forum.

The site found 6945 mentions of Clover’s stock ticker on the forum on 8 June, compared to just 414 the preceding Friday.

The vast majority of these were adjudged to be positive in sentiment, which has remained the case in the ensuing weeks. Though the volume of mentions has fallen away considerably, Clover remains one of the forum’s most mentioned stocks.

A brief spell of renewed social media interest from around 21 June – also evidenced by the Swaggystocks tool – translated to a resurgence in trading volumes, but not to a recurrence of the earlier price spike.

 

Interest in the stock dwindled over the last week of June, and at the time of writing, the price had fallen to just over $12.

But considerable numbers of retail investors continue to keep on an eye on the stock: Reddit’s CLOV forum – named for Clover’s stock ticker – has amassed over 34,000 members to date.

The insurtech fits the mould of previous meme stock insofar as a large proportion of its shares are being sold short by investors, making it an ideal target for non-professional investors trying to sniff out a short squeeze.

On 1 July, financial markets data provider S3 Partners included Clover in a list of highly-shorted stocks with short interests above 30%.

The development hasn’t gone unnoticed by the insurtech itself, which cautioned investors in filings it made to the Securities and Exchange Commission on 21 June.

It said: “A ‘short squeeze’ due to a sudden increase in demand for shares of our Class A common stock that largely exceeds supply and/or focused investor trading in anticipation of a potential short squeeze have led to, may be currently leading to, and could again lead to, extreme price volatility in shares of our Class A common stock.”

It continued: “Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”

Lemonade

While it may be a stretch to call it another ‘meme stock’, many of the same dynamics that have played out with Clover are also true of Lemonade.

The insurtech also has a significant amount of its float being shorted by investors, albeit less than Clover, at just short of 20%, fuelling speculation that increases in its stock price since mid-May could be the result of the short squeeze.

At the time of writing, Lemonade’s stock price had risen to over $112, having sat at around $60 on 12 May.

 

The company also enjoys a level of popularity among non-professional investors conversing online, although having not necessarily attained ‘meme status’ its dedicated Reddit investors’ forum boasts fewer members than Clover’s: just shy of 900 to date.

Speculating on the reason for this interest, Paul De’Ath, head of market intelligence at Oxbow Partners, said: “Lemonade makes quite a big deal about its environmental, social, and governance credentials – giving back to charities as part of the business mode, and so on.

“That could have been picked up on. It might be viewed as a more conscious insurer than some of the others out there. If you're looking for stocks within financial space, then something like that might be more appealing to a mass retail investor.”

The billing Lemonade receives as a ‘disruptor’ in the insurance industry also appears to be a factor behind the interest of online investors.

“Own the future,” declares a Tweet that has been copied and reposted by a number of investors, including some boasting thousands of followers.

It goes on to list a group of stock tickers, including Lemonade’s as the insurance analogue to the likes of Tesla, Airbnb and Netflix.

For its part, Lemonade welcomes retail investors’ attention. A spokesperson told Post: “Since going public last July, it's been a great pleasure for us to be able to engage with our retail investors through podcasts, Youtube, Twitter, and other social media channels.

“What we've found is a community that is highly engaged, highly inquisitive and highly supportive – smart people who really do sweat the details and are strategic and long-term in their thinking.

“These are investors after our own heart, and we feel privileged that so many of them are also our customers, who also often act as strong advocates for our products and indeed for our company.”

Downsides?

De’Ath said that while the fluctuations in stock price caused by social media-coordinated investing would likely have a limited operational impact on the companies that find themselves in the sights of forums like Wall Street Bets, they may still present headaches.

“If you're a company like Lemonade, and there's a good chance that you've raised money and listed on the stock market because you want to grow and you want to raise more money in future in order to bolster that growth in some way,” he said.

“If retail investors have piled in and inflated the value of your share price above what it should fundamentally be, then if you come to the market at a later point wanting to raise capital from more traditional institutional investors, they're unlikely to invest at that level.

“You're either going to have to do a deal at a much lower share price than your current price, which inherently damages the share price, and then there's questions asked by the retail shareholders as to why they've potentially lost money.

“An alternative is if you have a huge amount of backing from a whole load of retail investors, then if you need to raise money, maybe it's really easy to raise money, because you just make it known to the retail investors that you're looking to issue a whole lot more shares and they will get bought up by all the smaller investors.”

He added: “From a PR and reputation perspective, although it's nothing to do with you, if everyone swarms in, pushes the share price up, and then there's stories about lots of people losing loads of money when the share price falls back down again, that's not great for your public image.”

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