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Subject: One Company's Failure Is 150% Profit Potential for You
One Company's Failure Is 150% Profit Potential for You
By Mike Stenger, Associate Editor, Money Morning • March 3, 2021
Lately, the "smart money" has been portrayed as the "bad guy that devalues stocks." This is not entirely true.
The fact is, not every stock goes up, and short-sellers know this. That's why they were tanking stocks like GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings Inc. (NYSE: AMC), while young Robinhood traders pushed back with mass buy-ups.
Of course, this set the Internet abuzz with David-and-Goliath narratives about young traders battling their older, vicious short-selling counterparts.
The fire was fueled when Robinhood temporarily stopped trading specific securities so it could meet clearing house capital requirements.
Today, the mainstream media wants to force you to one side or the other. Are you betting on "big guy" or the "little guy"?
Good news: Investing is not "betting." And you don't have to choose. In fact, looking at the markets this way will be toxic to your portfolio in the long run.
The best way to make money in the stock market has always been an unwavering objectivity. So, as always, we have a way for you to profit from the mainstream confusion. It's an options trading strategy that could earn you 150% in as little as three months.
Here's how you should be thinking about this.
Why Short Interest Stocks Should Still Matter to You
Famous short sellers like Andrew Left of Citron Research wanted to prove they were with the "little guy." Left recently voiced his advocacy for Robinhood traders by abruptly cancelling all short reports.
A short report is a deep-dive investigation uncovering negative aspects within a company that might encourage hedge funds to short the stock. This is controversial because it can often bring stock prices down.
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So after 20 years of writing short reports, the Citron now says it will exclusively go long.
You don't have to be "smart money" to realize that's probably a bit hasty. Popular demand is a hell of a drug.
It's a fact of life that wherever there are winners, there are losers. Furthermore, while some stocks are excellent at winning, others make tremendous losers.
That means, no matter what the latest trends are, there will always be stocks that you don't want to touch with a 10-foot pole.
That is the point of a short report. Sure, sometimes they get it wrong. But a long projection can be just as wrong, just as often.
More important, however, is that short sellers don't bet against stocks for no reason. In fact, there's a good reason the big, smart money bets against certain stocks: They are not good.
The fact nobody wants to hear is that some stocks are fundamentally overvalued at current levels.
That won't stop viral movements like the recent short squeeze. But that doesn't have to stop you from investing consciously.
Staying rational, keeping a cool head, is vital to success in the markets. The smart money knows this. And the smart money often goes where the crowd is not.
Now, you have an opportunity to find money where the crowd is not. Here is the latest dog of a stock revealed by a short seller...
A Short Report Is Killing This Stock
Unlike Citron, Hindenburg Research isn't backing down from shorting.
Founder Nate Anderson recently said that short research offers "a perspective on a stock that departs from the conventional view" set forth by mainstream media and investors.
Rather than merely contrarian propaganda, Anderson calls it "deep-dive investigative research."
Hindenburg did such a "deep dive" back in 2020 with Nikola Corp. (NASDAQ: NKLA), an up-and-coming EV stock. Hindenburg's headline read: "Nikola: How to Parlay an Ocean of Lies into a Partnership with the Largest Auto OEM in America."
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Investors were happy to hold Nikola when it rocketed from $10 to $65.90, about 559% from its SPAC merger with VectoIQ.
They were less happy with the short report. Nikola stock has lost about 65% of its price since then.
This, of course, could demonstrate how "unfair" it is for a short seller to have the power to drop a stock so quickly.
But we are back to our main point: A short report is an alternative view on a stock. Sometimes it's wrong. Sometimes, a stock is so clearly bad that investors would be well-served to read the report.
I think Nikola was the latter. But you be the judge here...
Hindenberg's Nikola report said the firm had "never seen this level of deception at a public company," referencing Nikola's misleading investors.
In brief, the report accused Nikola CEO Trevor Milton of knowingly touting the company's ambition to "revolutionize the battery industry" even after finding out the technology existed only in theory.
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Nikola has since scrapped its deal with the technology provider, now in a deal to use General Motors Co. (NYSE: GM) battery technology and production capability. Despite all its hype, the only things Nikola brings to the table now are concept designs and a fancy name.
The company is painted as almost a glorified drop-shipper in the report. It's not because Hindenburg has it out for Nikola, but because Nikola has made many verifiably false claims in its effort to catch up with Tesla Inc. (NASDAQ: TSLA).
Even if a swarm of Robinhood traders decided they wanted Nikola to go "to the moon" tomorrow, it would still be a bad stock right now.
The same goes for this other stock, one that just got a huge "sell" signal.
How to Profit from this Stock's Failure
Clover Health Investments Corp. (NASDAQ: CLOV) is down 30% in the last month. And it's likely going to fall even further.
The company is a new Medicare service offering more cost-efficient coverage for patients and healthcare providers. However, it might be in trouble if there is any truth to the latest Hindenburg report.
The short seller highlights "misleading marketing practices" and an "undisclosed DOJ investigation" in the study. It implies Clover misled investors about these items in the lead-up to its January SPAC merger.
"I'll show you what to consider buying, what to sell, and exactly HOW to do it with less than $500."
Though Clover gained 60% in the weeks after its SPAC merger, a failure to disclose specific information could put the company dead in the water. This all hinges on the investigation.
But if it's found that the company did attempt to keep these proceedings under wraps, an investment in the company could be worthless.
The report points out the Clover is a parent of Seek insurance, when Seek advertises that it "doesn't work for the insurance companies."
The relationship between Clover and Seek, according to Hindenburg, was undisclosed.
Additionally, instead of the "best in class" product the company claims to sell, it was found that the company actually pays doctors extra to use their software, a medical data platform called the Clover Assistant.
Integrity is everything, as Nikola proved when it lost 60% in its scandal. Mind you, the Clover investigation is still pending, and the Nikola report was significantly more damning.
However, the jury has not even begun to take their seats in this scenario. If the investigation in any way uncovers deliberate fraud by Clover, it will be catastrophic.
So, we approach this with a simple put option trade. If Clove falls 40% or more from the current price, this play could make you a 150% return: 21 May $7.50 put on CLOV.
That's a put option with an expiration date of May 21 and a strike price of $7.50.
The stock is already headed downward. If it reaches $5, readers could more than double their money.
This is a great way to make money on a company's downside. And whenever a play like this succeeds, it clearly proves the worth of short reports like we've seen.
All that said, profiting in the stock market is best achieved by avoiding drama.
When the headlines try to draw lines between "us" and "them," take a step back and look at the objective facts. They will tell you that there is money to be made on both sides - and often, you're free to play either one.
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Mike Stenger
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Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.
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