Make a lot of money. That’s the goal of every investor. The simplest way that gives you the best chances of making money is buying great stocks and holding them for a long time. However, some prefer that their returns come much more quickly.
One path to generating huge gains in a short amount of time is by scooping up shares of stocks that are great short-squeeze candidates. The idea behind this approach is that stocks that have been heavily sold short will begin to rise, causing short-sellers to cover their positions and drive the share prices even higher.
Clover Health Investments (NASDAQ:CLOV) and Ocugen (NASDAQ:OCGN) are two stocks to consider with this get-rich-quick approach. Which is the better short-squeeze candidate? Here’s how Clover Health and Ocugen stack up against each other.
How heavy is the short-selling?
The most important ingredient for a potential short-squeeze stock is just how heavily the stock is sold short. It’s sort of like how much gasoline has been poured on a woodpile — the more there is, the bigger the flame will be.
You could just look at a given stock’s short interest, which reflects the number of shares sold short that haven’t been covered. However, the better metric to use is the short percentage of float. Outstanding shares represent all of the shares a company has issued, while float is the number of shares that are available for trading. The short percentage of float is calculated by dividing the short interest by the stock float.
There’s not much of a contest between Clover Health and Ocugen on this metric. Clover Health’s short percentage of float is close to 37% compared to only 25.5% for Ocugen.
However, it’s important to note that these figures are as of June 15. Short interest data (which directly impacts the short percentage of float) is only updated twice per month for stocks that trade on the Nasdaq Stock Exchange, as both Clover Health and Ocugen do. The number of shares sold short for both stocks has undoubtedly changed over the last couple of weeks.
What are the potential catalysts?
Using the analogy of the woodpile, if the shares sold short are the gasoline on the wood, potential catalysts would be the matches used to light the fire. So what are the potential catalysts for Clover Health and Ocugen?
Quarterly updates always offer the potential for pleasant surprises. Clover Health would be more likely to benefit from beating top- or bottom-line expectations since it’s already generating steady revenue whereas Ocugen isn’t. However, Clover Health won’t report its second-quarter results until August.
One potential positive catalyst for Ocugen relates to the expansion of its partnership with Bharat Biotech to include Canada. The Canadian market could actually present a greater opportunity for Ocugen (at least over the near term) than the U.S.
It’s going to be a while before Ocugen has a shot at winning U.S. regulatory approval for Bharat’s COVID-19 vaccine Covaxin. However, there’s still a possibility that Canada could give the vaccine Emergency Use Authorization. If that happened, Ocugen would likely be a textbook short-squeeze stock.
Sometimes no external catalyst is needed for a stock to move higher. Other times, a stock jumps when you’d normally expect it to fall. For example, Clover Health’s shares soared last week after the company warned in an amendment to a prospectus filed with the U.S. Securities and Exchange Commission that its stock could be highly volatile and decline significantly.
The squeeze and beyond
I think Clover Health is the better short-squeeze candidate than Ocugen right now. You’re not going to get a stronger hint than when a company warns investors that it could be subject to a short squeeze as Clover Health recently did.
Making money from a short squeeze requires paying close attention to a stock’s daily and sometimes even minute-by-minute moves. You can profit from a short squeeze, but only if you’re watching the stock like a hawk. When a short squeeze ends, the big gains evaporate. Anyone who doesn’t sell quickly enough can be stuck with a stock that trades at a lower price than what they paid.
That brings us full circle back to the approach to investing in stocks that’s the simplest and gives you the best chance to make money — buying and holding shares of great companies. This method isn’t nearly as exciting as jumping aboard a short-squeeze bandwagon. However, for most investors, it’s a much better way to generate solid returns.
Are Clover Health and/or Ocugen smart picks for a buy-and-hold strategy? For now, my answer would be no. I think there are many more stocks that offer better risk-reward profiles than either of these potential short-squeeze plays.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.