Clover Health (NASDAQ:CLOV) stock looked like a good pick at one time, but it is starting to look like it isn’t anymore.
It’s hard to admit when one is wrong, but this is something that happens when investing.
A long-term investor should cut losses when the original investment thesis is no longer valid. I believe I am close to that point with CLOV stock.
I’ve had CLOV stock on my radar for a while but never pulled the trigger as my technical indicators have never lined up for me. However, I believed in the company’s management and their vision and was a big fan. That belief has been shaken.
Share Offering to Dilute Existing Supporters
Clover released some disappointing news a few weeks ago. Company management announced the completion of its Public Offering of new shares.
They have sold approximately 52.2 million shares of CLOV stock for a price of $5.75. Underwriters have a 30-day option to purchase 7.8 million additional shares at the public offering price. Taking out discounts and underwriting fees, proceeds from the offering are about $300 million. These are all new shares offered by Clover itself thus will have a dilutive effect for existing shareholders.
This is incredibly disappointing on so many levels. The first is the dilution these shares have on future earnings. Since these are all new shares issued by Clover Management, the future earnings per share of existing shareholders become lower.
This is because with more shares now outstanding existing stockholders now own a lower percentage of the company. According to the company’s latest 10-Q, prior to the share offering, Clover had approximately 420.6 shares outstanding.
This secondary offering then would increase share count by a massive 12.4%. This translates to about an 11% hit to any future EPS.
Poor Timing for a Share Offering
The other disappointing aspect of this share price offering is the timing and price at which it was conducted. Offering new shares at a price of $5.75 is a major slap to the face of investors who supported the stock. Most of them were retail investors who believed in Chamath Palihapitiya and the mission of the company.
Remember it was only in January that CLOV stock became public via a special purpose acquisition company (SPAC). Shares were offered to investors for $10 at the time. The current offering price of $5.75 is approximately half of the SPAC price and reflects the poor sentiment currently surrounding CLOV stock.
Because of its successful SPAC, Clover was able to raise about $1.2 billion in cash. Now the company is saying that it needs additional cash. But why exactly? After such a successful SPAC, Clover should have enough cash for its operations.
Is the company signaling that it thinks its shares (which trade at around $4.65 today) are overvalued at $5.75? Or are there deep-seated issues with the company’s operations that we don’t know about? Could it be that Clover is burning through cash much quicker than management anticipated?
The company’s Medicare Advantage MCR has remained stubbornly high for the past few quarters. Clover’s MCR for Q3 2021 was 102.5%. This means that it cost Clover more to deliver medical care than it collected in premiums.
This could be a potential signal that Clover’s business model isn’t really working. Management has cited “working capital and general corporate purposes” as the reason it needed to raise capital. Simply put this explanation isn’t good enough. Clover management has promised to disclose more information after the 30-day quiet period.
Your Takeaway
Chamath and Clover management would need to work overtime to bring back investor trust in CLOV stock. Given that the company has no earnings the lack of confidence could spell a death knell for the stock. The famed investor bought an additional $10 million of stock at an average price of $5.75.
Whether this will be enough to inject confidence once more to CLOV stock remains to be seen. I would avoid this stock for now.
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On the date of publication, Joseph Nograles 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.
Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.
