Clover Health Investments (NASDAQ:CLOV) is a Medicare Advantage insurance plan, sold online, that came public through Social Capital Hedosophia II last June. CLOV stock has since become a speculative darling and, more recently, a short-selling target.
CLOV stock opens for trade April 27 at $9.22 a share. That’s 13% below its initial trade of $10.50, after it ended 2020 at $16.60.
Most recently, CLOV stock has found itself getting love on r/WallStreetBets, the sub-reddit that made GameStop (NYSE:GME) famous as it was about to go under. The discussion forum touts the motto “like 4chan found a Bloomberg Terminal.” Reportedly, CLOV was the fourth most-discussed stock on April 19.
For investors seeking to discover long-term value, this means you should stay away from Clover Health. For speculators who like to treat Wall Street as a game, pull up a chair.
CLOV Stock Not All That It Seems
I’m 66, and thus eligible to buy the Medicare Advantage plans sold by Clover Health. They currently do business in eight states, including my home state of Georgia, and at first glance the plans look attractive. The Georgia plan was launched in conjunction with Walmart (NYSE:WMT) health centers.
But according to the short sellers at Hindenburg Research, all is not as it seems. They found what they call conflicts of interest, an active Department of Justice (DoJ) investigation of business practices and alleged “upcoding” — attempts to defraud Medicare with fake diagnoses. Two days after the Hindenburg report came out, the Securities and Exchange Commission (SEC) opened a probe of Clover.
Not surprisingly, short interest has also increased. It stood at about 12.5% at the end of March. By April 16 it had reportedly increased to 37%. Hindenburg, which has not taken a position in the stock, has been monitoring the action and said reports on the squeeze were exaggerated. The figures have since been corrected.
If Clover’s problems mean a squeeze is on, Reddit speculators believe they can pounce on it. They can buy CLOV stock, or out-of-the-money call options, raising the price and forcing the shorts to close out their positions at a loss.
That’s what speculators inspired by r/WallStreetBets did with Gamestop. That’s what happened a half-decade earlier to Bill Ackman regarding Herbalife (NYSE:HLF). Even if you’re right on the merits of a short position, in other words, you can still wind up wrong if enough buyers stand against you.
Beware the SPAC Squeeze
Meanwhile, new accountants have joined the SEC to squeeze the SPAC boom. They want warrants to be treated as liabilities rather than equity. They want SPAC sponsors to be as transparent as the brokers who run initial public offerings (IPOs).
When a company comes public through a broker, the broker and management are careful not to make bold predictions. It’s not as easy as going on CNBC and touting an investment, as Social Capital’s Chamath Palihapitiya has done. At least, it’s not going to be that way now.
The real Clover Health is a sick stock, as our Mark Hake writes, with losses growing along with revenue. It’s competing directly with the industry’s giants, like UnitedHealth (NYSE:UNH), as our Faizan Farooque notes.
The Bottom Line
Clover has sought to bolster its credibility by naming Demetrios Kouzoukas, former principal deputy administrator of the Center for Medicare and Medicaid Services in the Trump administration, to its board and audit committee. He was also once general counsel at UNH’s Medicare division.
Maybe Kouzoukas can calm the waters. Maybe the Walmart connection will let Clover make money. But without more information I can’t make a fundamental call one way or the other.
Feel free to speculate, however, on momentum and who owns what. Just understand that’s what you’re doing, and that you could lose your stake.
At the time of publication, Dana Blankenhorn directly owned no shares, directly or indirectly, in any company mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.