Small-cap healthcare company Co-Diagnostics (NASDAQ:CODX) had a fantastic run in recent weeks. But it appears that the good times have come to a decisive end. CODX stock dropped more than 5% Thursday during the regular trading session, and it has fallen another 7% in early morning trading.
That’s because, on Thursday, Co-Diagnostics suffered numerous blows to the bull thesis. Short sellers took aim at the company’s perceived deficiencies. Journalists pointed out problems that states are having with novel coronavirus testing using Co-Diagnostics’ kits. And after the market close, Co-Diagnostics reported earnings. It did not go well. Here’s what you need to know.
Hindenburg Slams the Company
On Thursday, noted short selling firm Hindenburg Research took to Twitter to air concerns about Co-Diagnostics. Hindenburg’s tweet thread pointed out a number of potential issues with Co-Diagnostics. Among them, Co-Diagnostics partnered with PreCheck Health Services (OTCMKTS:HLTY) to distribute the company’s Covid-19 tests in Ecuador. Unfortunately, the SEC recently halted trading in PreCheck Health due to concerns about the accuracy of its press releases.
Hindenburg also noted that Co-Diagnostics has published a stunning 34 press releases since January. However, despite all the promotional activity, Co-Diagnostics didn’t bother to disclose hard figures around the actual amount of sales or revenues it was generating. As we saw with earnings Thursday evening, this was indeed a valid red flag. In addition, Hindenburg pointed out that Co-Diagnostic’s CFO previously served as director of another firm that was tied to boiler room operations.
The State Testing Contracts Issue
In addition to the Hindenburg matter, Co-Diagnostics stock fell Thursday on reports that the company’s test kits might not be working as well as hoped in various states. There are reports from Iowa, Nebraska, and Utah all questioning local Covid-19 testing practices that use Co-Diagnostics’ method.
Co-Diagnostics has claimed that its test results are 100% accurate, which would put it far ahead of most rival tests. However, journalists that have looked into the matter say that experts question whether Co-Diagnostics can really achieve anything close to that. In any case, it appears that politicians may cancel contracts that use Co-Diagnostics’ test kits. And the negative publicity will likely deter other government agencies from relying on Co-Diagnostics’ tests in the future as well.
An Uninspiring Earnings Report
Despite the dozens of press releases and all the excitement about selling kits around the world, Co-Diagnostics did not make money last quarter. In fact, it lost 5 cents per share for Q1, which came in a penny shy of expectations. Additionally, the company scored a paltry $1.6 million of revenues for the quarter. From the amount of enthusiasm traders had drummed up for Co-Diagnostics, you would have thought they were going to report a sizzling quarter. Instead, the numbers flopped.
Shares dipped sharply following the earnings report, with the decline accelerating once the conference call started. On the conference call, the company showed rudimentary tech skills. It failed to mute participants on the call, which allowed tons of people to talk at once and turned the scene into pandemonium. Think that’s hyperbole? Here’s how Salt Lake Tribune reporter Erin Alberty described the proceedings:
“Out of curiosity I dialed into the $CODX quarterly earnings conference call today, and I guess they unmuted everyone. I’m hearing lots of cussing, dogs barking, and intermittent calliope music. It’s my first earnings call, are they always like this?”
Needless to say, holding an entirely unprofessional conference call only added to the questions around Co-Diagnostics’ credibility. When you’re dealing with human health during a pandemic, it’s not a good look to appear shoddy. The company acknowledged the poor showing, but the damage was done as CODX stock sank like a rock following the earnings report.
Time to Skip CODX Stock?
At the end of the day, you have dozens of companies trying to come up with the best Covid-19 test. There’s little reason to think that Co-Diagnostics will be the winner out of an extremely crowded playing field. Especially one where so many other participants have much longer track records of success and sport far larger research and development budgets.
At the right price, there may be some place for this sort of speculation. However, Co-Diagnostics’ shares have already run up tremendously. Combine that with all the questionable details around the company, and there’s great reason to sell shares here. Once the coronavirus enthusiasm wears off, it’s likely that CODX stock will end up plummeting. Traders might get lucky continuing to own the stock. But the odds are poor.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
