On its face, Clover Health (NASDAQ:CLOV) stock seems like a reasonable bet on the growing needs for the healthcare industry.
According to its website, Clover “operates as a next-generation Medicare Advantage insurer,” leveraging its Clover Assistant software to provide affordable services for senior citizens.
Of course, the narrative for CLOV stock doesn’t end there. Not even close.
Earlier this year, my colleague Larry Ramer cited a series of alarming allegations that short-seller Hindenburg Research leveled.
In particular, Hindenburg alleged that the Department of Justice was investigating Clover for various issues, including everything from kickbacks to marketing practices to undisclosed third-party deals. Naturally, the accusations did not go over well with stakeholders, who proceeded to dump out of CLOV stock.
The Problem With SPACs and CLOV Stock
The problem that gnawed at me when I first discussed Clover was the hoopla surrounding special purpose acquisition companies (SPACs).
This relatively obscure financial vehicle — an alternative to the traditional initial public offering — existed for many years, but it wasn’t until recently that SPACs sparked a life of their own.
It seemed to me that some investments only went up because they were SPACs.
Frankly, the drama over CLOV stock has not helped me form a better opinion of these blank-check companies.
Clover Health went public via a reverse merger with a Chamath Palihapitiya-backed SPAC, and the results (you might argue predictably) have not been pretty.
Having extensively researched SPACs, I can see their potential. Primarily, SPACs exist because they provide a cleaner approach to going public.
With a traditional IPO, you must go through an extensive vetting process. Some startups may not have the resources to deal with it.
Also, SPACs are good for everyday retail investors. With a traditional IPO, you’re always the victim of the IPO pop — the institutional folks got in at the initial offering price. With pre-disclosure SPACs, you often buy in at $10 a share like everyone else.
On the surface, SPACs sound like a great deal — and they very well can be. But this assumes that blank-check firm sponsors are acting ethically and in the best interest of shareholders.
Unfortunately, this is where CLOV stock is stuck in a murky situation.
CLOV Stock and the Litany of Failures
One of the biggest dilemmas about SPACs is that their sponsors and their shareholders do not necessarily have aligned interests. In other words, rather than the Titanic, SPACs risk being the Costa Concordia of the investment markets.
That’s because SPAC sponsors usually get their take — usually 20% equity of the combined entity — no matter what. So, unless you have a specially designed SPAC where that’s not the case, sponsors typically are incentivized to cut a deal, not necessarily to cut a good deal.
Well, the issue for CLOV stock is it’s incredibly emblematic of the risks associated with SPACs gone wrong. Furthermore, it really doesn’t help matters that Palihapitiya is associated with this disaster.
He might even risk being labeled the Francesco Schettino — the disgraced captain who did not give a care about the Costa Concordia’s passengers — of the SPAC movement.
According to a particularly damning report by Bloomberg, “All six of Palihapitiya’s Social Capital Hedosophia-linked blank-check companies, including three that already completed mergers, have plunged more than the broader SPAC market since it hit its peak in mid-February.”
Bloomberg published this article on April 17. A cursory look at some of the SPACs, including the much-hyped Virgin Galactic (NYSE:SPCE), has shown that a few weeks’ time was still not kind for the comparison.
Further, this might be a bit of karma kicking in for Palihapitiya. Throughout this SPAC craze, he’s done a brilliant job of self-promotion, essentially crowning himself as the king of reverse mergers. But the issue is that if you’re running your mouth, you’ve got to back up your trash talk.
As well, Palihapitiya went after the Oracle himself, Warren Buffett, proclaiming that he will be the investment guru of his generation. He may have gone overboard, thus possibly turning off investors.
Stay Away from Clover
To be fair, the narrative for CLOV stock isn’t completely divorced from merit.
For instance, based on Clover Health’s Form 8-K, the company generated nearly $673 million in revenue in 2020, which was up almost 46% year-over-year. As well, it cut down its net loss by 62.5% to $136.4 million.
Still, CLOV stock is a case where the emotional baggage is a serious liability. Further, with Palihapitiya becoming a reverse Midas — and deservedly so, in the eyes of many investors — Clover is simply too toxic to touch.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.
