From my perspective, Clover Health (NASDAQ:CLOV) has now exhibited at least four red flags. As a result, I continue to urge investors to sell CLOV stock.
These red flags include: the resignation of its CFO, its declining profitability, the SEC investigation against it and a report by a credible short seller.
Also noteworthy is an assertion by another InvestorPlace columnist that the company’s technology is not as advanced as it claims.
The CFO’s Departure and the SEC Probe
Whenever a CFO resigns from a company, it raises a red flag in my mind. That’s because sometimes (and I’m not alleging that this is the case with Clover), CFOs resign because they know that their company will soon face consequences for financial irregularities and/or that the firm is going to struggle mightily financially in the future.
On July 15, Clover disclosed in a press release that its CFO, Joe Wagner, would resign for “personal reasons” as of Aug. 13. In the release, Wagner was quoted as citing “health challenges related to a family member” as the reason for his departure. Still, I’m concerned that other issues involving the company and its outlook may also have been factors in Wagner’s decision to leave.
Making the CFO’s departure particularly worrisome is the fact that, as I’ve pointed out in previous columns, Clover is being probed by the SEC. The company has said that it thinks the probe is related to a report by short-selling firm Hindenburg Research, which has called Clover a “broken business,” and alleged, as I wrote in February, “that much of Clover’s revenue is fueled by a brokerage firm controlled by Clover’s Head of Sales, Hiram Bermudez.”
Additionally, Hindenburg, which I have found to be mostly accurate in the past, charges that “Clover’s software is primarily a tool” to generate more money from Medicare with inappropriate diagnoses.
Those are very serious charges. If true, it seems to me that the company would potentially be guilty of serious violations of securities laws as well as Medicare fraud.
The fact that the DOJ thought that these charges had enough merit to warrant a probe is quite worrisome.
Lack of Profitability and Potentially Exaggerated Technology
When a company has been in business for many years and is not yet profitable, that suggests that it may have fundamental issues. That’s particularly the case if its losses are increasing rather than decreasing. (Clover Health was founded in 2014.) And if a company’s gross profit is falling and negative, that’s really bad news for its shareholders.
Clover’s Q2 loss from operations came in at $181.3 million, versus a $23.17 million profit during the same period a year earlier. Clover’s revenue less its net medical claims incurred, which I believe is similar to gross profit, was about -$46 million last quarter, versus roughly +$52 million during the same period a year earlier.
And in Q1, when the pandemic was much less of a factor in the comparisons, Clover’s results were not all that much better. In that quarter, its loss from operations came in at $119 million, versus a $26.6 million loss during Q1 of 2020. And the company’s revenue less net medical claims incurred was -$14 million in Q1 of 2021, versus roughly +$19 million during the same period a year earlier.
On the technology front, despite the firm’s claim to be a tech disruptor, another InvestorPlace writer, Muslim Farouque, in July reported that, actually, ” many top health insurance providers are software-intensive and have developed similar data analytics and diagnostic technologies.”
The Bottom Line on CLOV Stock
Saddled with an ominous-looking DOJ investigation and widening losses, along with an unsubstantiated claim of tech disruption, CLOV stock is a very dangerous name to own right now. And the resignation of its CFO has not improved its outlook.
In light of these points, as well as the weakening of meme stocks in recent weeks, I urge investors to unload CLOV stock.
On the date of publication, Larry Ramer 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.
