Clover Health Investments (NASDAQ:CLOV) is a company in the healthcare sector that has experienced somewhat of a heart attack — or more accurately, a serious short-seller attack. This company went public via a merger with a special purpose acquisition company (SPAC) back in January, but it has been a bit of a bumpy ride for CLOV stock ever since.
Typically, I have an unwavering opinion about SPACs; I do not like them. Why? They are often overvalued and tend to present overly optimistic financial projections. They are also frequently driven by enthusiasm, which leads to a surging stock price without any real substance behind it. When this enthusiasm fades, SPACs often crash. Their prices deflate like a balloon losing air too fast.
So, this in mind, is there anything that makes CLOV stock any different? Here’s what you should know about Clover Health and its stock.
CLOV Stock: What Goes Up Must Come Down
If you bought CLOV stock in early 2021 and still hold it, you know the bad news. This name has lost about 50% of its value, dropping from a price of around $15 in January to an open price of $7.59 on May 17. Back on Jan. 4, CLOV reached its 52-week high of $17.45. What’s more, from October to December, the stock had surged almost 70%.
Most SPACs follow a pattern. They go higher upon speculation and expectations and then lose a significant amount of their perceived value when logic returns to the market. If this pattern was always correct and repeating, though, investors could easily make good returns from investing early in SPACs. But I do not suggest that investors should do this. After all, SPACs are not for everybody due to their speculative nature.
Rather, my point is that even after a strong selloff for SPACs — and CLOV stock especially — the underlying fundamentals should still be examined. That’s because the fundamentals will supply the reasons for any returning pattern in the stock price. Enthusiasm aside, that will tell you whether to stick with CLOV or not.
Short Selling Caused the Selloff
It does seem like there is little reason to stick with CLOV, however. Back in early February, Hindenburg Research reported some very serious allegations. The report was titled “Clover Health: How the ‘King of SPACs’ Lured Retail Investors Into a Broken Business Facing an Active, Undisclosed DOJ Investigation.” Some of the main causes for alarm in the research were as follows:
- “Critically, Clover has not disclosed that its business model and its software offering, called the Clover Assistant, are under active investigation by the Department of Justice (DOJ), which is investigating at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals, according to a Civil Investigative Demand (similar to a subpoena) we obtained.”
- “Clover claims that its best-in-class technology fuels its sales growth. We found that much of Clover’s sales are driven by a major undisclosed related party deal and misleading marketing targeting the elderly.”
- “Clover claims its software ‘delights’ physicians, but according to doctors and former employees we interviewed, they use it because Clover pays them extra to use it. Physicians are paid $200 per visit to use the software, twice the normal reimbursement rate for a Medicare visit.”
Of course, these are all huge red flags against CLOV stock. First of all, ethically, any misrepresentation that aims to deceive investors about the true fundamentals of Clover’s business prospects is unacceptable. That misrepresentation is also reason for legal action against the company. As such, it’s best to wait for the outcome of this DOJ investigation.
True, CLOV stock has been mentioned on Reddit forums like r/WallStreetBets quite a bit. There were attempts to manipulate its stock price based on short-squeeze estimates and reports. But this is a very dangerous game, too. Prudent investors would be wise to avoid.
What About CLOV Stock’s Fundamentals?
So, with this DOJ case still in the works, are there any reasons to like CLOV stock?
In short, I don’t think so. For example, the 8-K submitted by the company back in early January highlights two more major negatives.
First, Clover has a shareholder deficit, also known as “negative book value” or “negative equity.” This shows that the company has more liabilities than assets, which is not positive.
Clover’s shareholders’ deficit grew to -$617.1 million in 2020, compared to -$488.5 million in 2019. What’s more, cash flows from operating activities showed a net loss of $136.3 million in 2020, compared to a loss of $363.7 million in 2019.
On top of this, though, Clover has brought investors major stock dilution via the combination agreement. That’s also not positive for the intrinsic value of the stock. So, with net losses for now, I cannot be optimistic about the valuation of CLOV stock.
Is It Time to Be Defensive in Investing?
Finally, though, there’s another important factor to mention here: the recent selloff of U.S. equities.
Concerns about inflationary pressures in the broader economy and profit-taking as major stock indexes were at all-time highs may indicate a rotation in capital to safer value stocks rather than growth stocks. With this shift of investment strategy for both institutional and individual investors, it may be time to choose names that either pay dividends or are in defensive sectors.
While healthcare is a defensive sector, not all stocks in the space are considered defensive due to their qualitative fundamentals. Unfortunately for CLOV stock, it cannot be considered defensive. Instead, it is speculative and plagued with issues.
So, until earnings show a lot of progress here, I would avoid CLOV completely for now.
On the date of publication, Stavros Georgiadis, CFA did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.