It’s amazing to consider that next-generation Medicare Advantage insurer Clover Health (NASDAQ:CLOV) would become the focus of so much attention. CLOV stock was completely under the radar not too long ago, but things can change quickly in this fast-paced market.
As you may recall, Clover Health announced its plans to go public via a merger with special purpose acquisition company (SPAC) Social Capital Hedosophia Holdings III.
That company traded as IPOC stock, but that’s gone now and we have CLOV stock in its place. It was an attention-grabbing event because Social Capital Hedosophia Holdings III was sponsored by none other than Chamath Palihapitiya (a.k.a., the SPAC Lord).
So much has happened since then. From hype-tastic debut to SPAC-tacular failure – and now the meme target du jour – there’s an awful lot to unpack here. Ready to take a roller coaster ride?
A Closer Look at CLOV Stock
Prior to the aforementioned reverse merger announcement in October 2020, CLOV/IPOC stock stayed close to the $10 level.
However, that announcement gave the stock a jolt, and it finished the year at nearly $17.
SPAC mania faded somewhat in early 2021, and so did the Clover Health share price. In May, the stock bottomed out near $7.
That’s mind-blowing, if you think about it. The post-merger disappointment was so severe that CLOV stock dropped below the pre-merger-announcement price.
Come to think of it, I probably should have reserved the term “mind-blowing” for what happened next.
With hardly any warning, the Clover Health share price shot up like a rocket, reaching a 52-week high of $28.85 on June 9.
That moon shot was clearly unsustainable, as CLOV stock soon retraced nearly half of that move. As of June 11, it was trading at $15.03.
So, what the heck happened in June? Was there some spectacular news development involving Clover Health? A game-changing innovation, or perhaps a blockbuster earnings report?
The answer is: none of the above. Like it or not, we must credit Reddit for the wild pop in CLOV stock.
The irony runs deep here. In January, the stock tanked after Hindenburg Research suggested that Clover Health had used questionable tactics to lure retail investors into purchasing the company’s shares.
And now, there’s no need to lure people into the trade as they’re gladly jumping in, often without conducting the proper due diligence.
Maybe we all should have seen this coming. After all, CLOV stock checked all of the right boxes for a Reddit short-squeeze target:
- Low-priced stock
- High short interest
- Float isn’t too large
- Not a blue-chip stock
- Company has underdog status
A Devastating Downgrade
I have to admit, I like the idea of betting on an underdog. Still, I believe it’s wise to wait until the volatility passes before taking a position.
Moreover, we might expect the analyst community to issue downgrades on CLOV stock. In fact, one big-bank analyst has already weighed in with a not-too-optimistic outlook.
Recently, Bank of America analysts downgraded their rating on Clover Health from “neutral” (which is similar to “hold”) to “underperform” (similar to “sell”).
On top of that, they assigned a $10 price target to CLOV stock. That’s pretty devastating, as it implies a 33% haircut if the stock is trading at around $15.
Bank of America analyst Kevin Fischbeck cited comparative valuation concerns:
“After the recent spike in CLOV, we are downgrading [because] the company is now trading at a 70% premium to ALHC [its closest comparable stock] despite a similar growth profile and lower near term margin trajectory.”
The Bottom Line
Fischbeck’s point is well taken. The current price of Clover Health shares isn’t necessarily justified by the company’s fiscal standing.
And beyond that, there’s nothing wrong with sitting on the sidelines and enjoying the fireworks from afar – which also means avoiding any potential injuries.
On the date of publication, David Moadel did not have (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.