If you’ve followed my work over the past several weeks, I’ve expressed my discomfort with the frothiness of the market. And perhaps the scandal that has suddenly impacted Clover Health (NASDAQ:CLOV) is yet one more piece of evidence that the market is about to enter a corrective phase. In February, CLOV stock plummeted nearly 20%.
Early in February, Clover Health – which went public via a special purpose acquisition company backed by Chamath Palihapitiya – fell under fire due to a scathing report from short-selling specialist Hindenburg Research. As our own Larry Ramer noted, Hindenburg alleges that the U.S. Department of Justice is actively investigating Clover for “issues ranging from kickbacks to marketing practices to undisclosed third-party deals.”
Before you even think about gambling on CLOV stock – in one direction or the other – I recommend you read Ramer’s detailed analysis. I won’t spend excessive effort rehashing my colleague’s excellent write-up. However, one point that did stand out was that Clover has an “independent” subsidiary called Seek Insurance.
Seek claims that it doesn’t work for the insurance companies but rather for the customer. However, Ramer states that in Clover’s defense against Hindenburg’s accusation, “Clover appears to have tacitly admitted and/or failed to dispute that it was being investigated by the Department of Justice and that its subsidiary claims to be independent but refers business to Clover.”
To be clear, from Hindenburg’s website, the DOJ issued a Civil Investigative Demand (CID) against Clover. CIDs are governmental requests for information and is a powerful pre-litigation tool, according to the National Law Review. However, CIDs don’t necessary spell doom for CLOV stock – there might not be anything substantive to investigate in the end.
Interestingly, Hindenburg claims it doesn’t have a short position on CLOV stock. Typically, a financial motivation exists to issue a “hit” piece like this. So, should investors buy into Clover’s discount?
CLOV Stock Reveals the Dangers of SPAC Fever
For one thing, I wouldn’t read too much into Hindenburg’s alleged non-short position in CLOV stock. After the beatdown that billion-dollar hedge funds suffered shorting suddenly high-profile names like GameStop (NYSE:GME), traders, even the high-rollers, are hesitant to go bearish.
Second, I understand the point that Clover responded directly and robustly against Hindenburg’s accusations. Indeed, InvestorPlace contributor Mark Hake stated that he was “impressed” with Clover’s detailed counterarguments. However, I’d like to point out that this is what’s expected of companies accused of shenanigans.
Can you imagine if a CEO of a short-firm targeted company said, “Yup, you got us. We were cooking the books. Dump our stock now.” Perhaps some points for honesty would be in order but that would probably be its own legal issue.
What really strikes me about CLOV stock is not just the alleged investigation, but also what it implies for SPACs. Earlier in February, I warned readers that they should be careful about another Chamath Palihapitiya backed SPAC called Social Capital Hedosophia Holdings VI (NYSE:IPOF).
Basically, my argument was that many people are buying into SPACs as feasible ways for regular folks to participate in initial public offerings. However, the reality is that, like IPOs, unless you’re well-connected and well-heeled, you’re the last in line. Everybody else in the SPAC supply chain has already made their money, leaving you to profit purely on the whims of speculation.
By the way, IPOF recently experienced a double digit percentage drop of its own.
Further, SPACs are particularly problematic during market frenzies – such as the environment we have now – because fewer investors are paying close attention to the compensation structure of this platform. As I explained in an article for Benzinga, SPAC sponsors often get paid for getting a deal done, not necessarily for getting a good deal done.
Time to Watch from the Sidelines
Is CLOV stock a bad deal then? It’s difficult to say. As I mentioned earlier, the DOJ’s investigation could turn up nothing. In that case, there’s a chance that shares could fly.
However, there’s also a possibility that it could find something. After all, Clover is deeply tied to Medicare and improprieties with Medicare is a multi-billion-dollar problem. Perhaps most worryingly, short sellers have an excellent track record these days of sniffing out red flags.
Don’t misread this – I’m not suggesting that Clover is doing anything wrong. I’m suggesting that if you want to invest in Clover, you should wait until we know the results of the investigation, one way or the other. Given the unknowns and also the severe penalty Clover would incur if something turns out to be amiss, investors should stay on the sidelines with CLOV stock.
On the date of publication, Josh Enomoto held a long position in GME.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.