Clover Health Was an Appealing Short Squeeze, But It’s a Bad Investment
What happens if you hold onto a short squeeze stock long after the short squeeze has ended? Clover Health (NASDAQ:CLOV) stock is giving traders a demonstration. And it isn’t pretty. Since early June, when Clover peaked, shares have lost two-thirds of their value amid an unrelenting sell-off.
And, unfortunately, there’s little sign that the downturn is about to end. Clover is a company facing serious questions both around its credibility and business model. With the trading catalyst around the short squeeze already played out, there’s little reason to hold onto shares.
Clover: The CFO Is Out
Two weeks ago, Clover announced that its CFO, Joseph Wagner, is leaving the firm next month. Wagner is leaving for the stated reason of wanting to spend more time with his family. However, given that Wagner is only 46 years old, investors might speculate about other potential motives for Wagner giving up a high-profile job at a publicly-traded company.
It’s also important to recall that Clover Health ran into hot water because it failed to disclose a Department of Justice inquiry into its business. CLOV stock plunged once short sellers made the public aware of this information. The CFO leaving unexpectedly only adds to concerns about Clover’s credibility and trustworthiness. Are there any other matters that investors might wish to know about?
As it stands now, Clover has brought on an interim CFO from AlixPartners until it can find a permanent replacement. AlixPartners is known for helping failing companies restructure their businesses and have worked with numerous prominent companies going through crises. Clover Health, too, appears to be in full-on crisis mode and in need of a turnaround specialist, despite all the hype and marketing around it being a tech darling just months ago.
What’s Clover’s Edge Over Far Larger Rivals?
Clover likes to talk a big game about its investments in big data, artificial intelligence (AI) and other tools for insurance underwriting. It’s unclear what tangible benefits, if any, Clover has over far larger rivals, however. Industry leaders such as United Healthcare (NYSE:UNH) are also investing heavily in these fields. They have many multiples of Clover’s financial resources, and in addition, given the huge market share, United has more data to work with in optimizing its insurance policies and pricing.
InvestorPlace contributor Mark Hake pointed out that Clover simply isn’t getting sufficient operating results. Its operating loss is continuing to widen. Its insurance underwriting metrics have gotten worse. And it trimmed its revenue guidance going forward. This was before the CFO left as well; who knows if there will be more troubles that emerge as the company transitions its financial leadership?
CLOV Stock Verdict
The thesis on CLOV stock was that there would be a short squeeze. The stock then went from $8 to $28. Mission accomplished. It’s unclear why Clover remains a popular trading security now, however. The shorts were covered and everyone playing a technical move had a chance to exit with large profits.
Clover, the actual underlying business, remains unproven. Indeed, it might be worse than that. It came public via a special purpose acquisition company (SPAC). Historically, many SPACs have turned out to have poor results for long-term investors. Sometimes, SPACs fail to fully present their investors with a realistic view of the company’s prospects. Given Clover’s unwillingness to disclose a Department of Justice inquiry, investors should be wary of Clover’s practices more generally.
The disclosure issue was bad enough on it’s own, and now the CFO leaving adds to the underlying concerns around the business and management team.
Part of trading is knowing when to move on. Clover might have made sense as a short squeeze play a couple months ago, but that time has long since passed.
On the date of publication, Ian Bezek 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.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
