There are a few reasons why investors piled into Clover Health (NASDAQ:CLOV) stock this year. It was a popular SPAC stock headed by the charismatic Chamath Palihapitaya. And its Jan. 8 merger with Social Capital Hedosophia, a SPAC, made many investors aware of the company. Clover is a Medicare insurance services provider.
But the price action of CLOV stock has been disappointing since that time. It began publicly trading at $15 and fell to $7 less than two months later. Speculators who were seeking a short squeeze, however, kept it relevant for months thereafter.
The short interest of the stock was in the 40% range, and ultimately a short squeeze occurred in mid-June. As a result, its price tripled. But there’s little reason to be intrigued by CLOV stock at this point.
Short Interest Is Still High
Currently, 14.5% of Clover Health’s shares are being sold short. That’s a far cry from the 40% levels that triggered a short squeeze this summer. As a result, even speculators should avoid CLOV stock.
That’s because it will take a long time for the short interest to reach its old highs, creating another squeeze. More likely, another squeeze simply won’t materialize at all.
So only investors who focus on fundamentals can lift Clover’s shares. But unfortunately for Clover Health, its fundamentals are not strong.
Don’t Be Fooled
Clover Health released its second-quarter earnings on Aug. 11. That’s quite a while ago, but it is important to note that the results included signs of serious trouble.
Some growth investors were clearly intrigued by the company’s top line increase. Specifically, Clover Health’s Q2 revenue jumped 140% year-over-year to $412 million. CLOV stock spiked 11% on the news.
Then the shares dropped like a stone, losing 16% of their value in the next week. The reasons for the sharp downturn were fairly straightforward. Beyond the top-line results, the report included multiple signs of big trouble that were very apparent.
Losses and Business Model
The most important problem for Clover is its net losses. In the second quarter of 2020, Clover Health posted $5.4 million in net income. Last quarter, the company generated a net loss of $317.6 million.
A big part of the reason for this shift is the company’s business model and the firm’s inability to execute effectively.
One of the most important performance indicators for Clover is the ratio of payments that it receives relative to the benefits it pays out.
Ideally a Medicare insurer will receive premiums, pay out claims, and have a profit left over because its premiums exceed its payouts. Insurers refer to this metric as the medical cost ratio. A 90% ratio, for example, indicates that the company paid 90 cents of benefits for each $1 of premiums that it received.
But Clover Health recorded a medical cost ratio of 111% in Q2. In other words, the company paid out $1.11 for every $1 that it received in patient premiums.
The company said that, excluding Covid-19 related issues. the ratio would have come in at 97%. But even if that was the case, the ratio, which was 70% in Q2 of 2020, is trending sharply in the wrong direction.
The Bottom Line on CLOV Stock
Stay away from the shares. Given the company’s poor fundamentals, it’s not worth investing in. Further, another short squeeze seems unlikely to materialize, due to the low level of short interest in the stock.
On the date of publication, Alex Sirois 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.
