Clover Health (NASDAQ:CLOV) today finds itself in the stock market graveyard. At around $2.54 per share today, CLOV stock is down around 90% from its all-time high, set during its short time as a short squeeze play.
Since coming back down to earth, the “story” with the digital first Medicare Advantage insurer has largely stayed the same. Its platform is seeing incredible levels of revenue growth. But a path to profitability? It’s nowhere in sight, as it continues to pay out more in claims than it takes in as premiums.
On its steady drop from nearly $30 per share, down to the low single digits, many were burned trying to call a bottom with this falling knife. However, at today’s prices, it may finally be the time to buy it as a turnaround play. Albeit, one with long-shot chances of actually turning itself around.
Obviously, this shouldn’t be a big position in your portfolio. Yet, if you are building a basket of high-risk stocks, where gains from a few of them could make up the losses from the bulk of them, then CLOV stock may be worth diving into today.
The Situation With CLOV Stock
Among the former short squeeze plays that made big moves in 2021, Clover is in a relatively better place. That is, unlike SmileDirectClub (NASDAQ:SDC) or ContextLogic (NASDAQ:WISH), it’s not dealing with the challenge of getting revenue growth back on track.
As seen from recent headlines about its membership growth, the company continues to take off as a Medicare Advantage platform. It still appears well-positioned to hit 2022 revenue projections ($2.65 billion). Right off the bat, this factor may make CLOV stock a better turnaround play than its similarly beaten-down meme peers. Of course, while this makes it a better situation, that doesn’t mean it’s a low-risk situation. Far from it, as the company has something else it needs to resolve first.
What’s the hurdle it needs to climb over first? Clover still needs to bring down its unsustainably high medical cost ratio (MCR) before the market will warm back up to shares. It needs to go from spending more than 100% of its premiums on claims, to spending 85%-90%. After that, all it needs to do is get its revenues to a level where the spread between premiums and claims covers its overhead expenses.
The second part should be easy. At least, based on the demand for its disruptive platform. Offering better care at lower costs, it is growing in popularity among both medical professionals and patients. It’s the first part (bringing down MCR) that’s the challenge.
Risk/Return With Clover Stock at Below $3 Per Share
Admittedly, much of the discussion you can have now about CLOV stock and its MCR hurdle is pure speculation. Until we see its next quarterly numbers in late February, it’s hard to tell whether or not its claims costs are temporarily high (due to the pandemic recovery). That’s the explanation management has provided to investors. As many companies have used “the recovery” as an excuse for their woes, it makes sense to be skeptical.
With little to go with besides management’s “transitory” thesis, it’s tough to handicap the odds it gets over this cost control issue. Yet given the price shares change hands for today, you may not even need to figure out the exact odds to know if risk/return is in your favor.
However, if the situation gets worse, downside risk may be more minimal than you think. Sure, if it continues to post high losses, chances are it’ll need to do another dilutive secondary offering, like the $300 million one from November. More secondary offerings would for sure put more pressure on shares. Yet it probably wouldn’t cause it to sink another 80%. Assuming, of course, it was making some progress getting costs under control, reducing the chances it goes bankrupt.
Conversely, if in its next earnings report, and subsequent reports, Clover starts to show that its MCR is getting down to industry norms? Coupled with the continued growth of its top-line, it’s easy to see sentiment swing back for the stock. Even if it only gets back up to the high-single digits, that’s a big gain relative to where it sits today.
The Verdict: Clover’s at a Price Where It’s Worth the Gamble
With the continued sell-off of more speculative plays over the past few months, many risky yet high potential names are now on sale. In terms of former meme favorites, a lot of them (like SDC and WISH) still look like bad buys, no matter how low the price.
In the case of CLOV stock, however, it may be worth rolling the dice at today’s prices.
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On the date of publication, Thomas Niel 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.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.