Clover Health Investments Isn’t a Long-Term Stock Despite Proof of Concept

Stock Market

Chamath Palihapitiya is riding high these days. Wall Street’s biggest exponent of special-purpose acquisitions companies, or SPACs, is hoping to create as much wealth as Warren Buffett. He has a pretty good track record thus far. However, the one chink in his armor is Clover Health Investments (NASDAQ:CLOV). CLOV stock is down 36% in the last three months.

A close-up of a clipboard that is labeled "Medicare Advantage."

Source: Shutterstock

On Jan. 8, the San Francisco-based provider of Medicare Advantage health plans merged with “blank check” company Social Capital Hedosophia III, one of the many SPACS raised by Palihapitiya.

Investors who bought Social Capital Hedosophia III stock at its $10 offering price laughed their way to the bank, making a paper return of about 60% by the end of the first day of the new ticker trading.

Fairy Dust in the Wind

However, the fairy dust soon wore off.

There are a couple of reasons for that. First, blank-check companies have a typical cycle that they go through. When a merger is announced, the SPAC’s stock will skyrocket. Once the ticker starts to trade, retail traders book their profits and look elsewhere.

There are other factors at play as well, and if you haven’t checked out Will Ashworth’s recent article here on CLOV stock, you really should. It tells you how hedge funds play the SPAC game.

It’s a fascinating piece. Without repeating too much what he wrote, hedge funds’ strategic exit before a SPAC merger is finalized also does a number on the stock price.

Separately, Clover Health has been the target of short-sellers lately, leading to a bit of skepticism among mom-and-pop investors.

Overall, I believe CLOV stock is interesting, but we need more incentive to buy in. With SPAC hype fading, all eyes will turn toward business fundamentals, and that’s where there is more work to be done.

Positive Catalysts for Beat-Down CLOV Stock

On the surface, Clover Health is an interesting concept. U.S. total national health expenditures grew to $3.8 trillion in 2019, rising over 4.6% year-on-year. Although estimates will vary, the total health expenditure is forecast to reach $6.2 trillion by 2028.

Betting on a medical insurer makes sense on several levels. The company has concentrated on the Medicare advantage private plan alternative from which it derives roughly $10,000 in annual revenue.

If the company expands to tap the traditional Medicare market, it will greatly improve its bottom line.

Plus, the Center for Medicare and Medicaid Innovation has picked the health insurer as one of 53 direct contracting entities participating in a CMS initiative to promote risk-sharing and provide value-based care.

If you have read so far, you may be asking yourself what gives. If the company has an attractive asset-light business model and some positive catalysts, why shouldn’t you buy in?

Well, it comes back to my favorite topic, fundamentals.

What’s Under the Hood

I will not waste a lot of your time talking about valuation. Any company with annual revenues of $672.9 million and a market cap of $3.01 billion cannot be categorized as cheap.

If you take that number and calculate the share price-to-sales ratio, it comes to 4.47 versus the industry average of just 0.8 and the S&P 500 average of 3.1.

Its main competitor, UnitedHealth Group (NYSE:UNH), is trading at 1.4 times P/S despite having superior fundamentals.

At this point, we don’t have a track record of earnings for Clover Health. The company reported a loss from operations of $92.7 million in its year-end results, which compares favorably with a $183.2 million operating loss last year. However, operating expenses still managed to increase by 18.6%.

Short-seller Hindenburg Research criticized Clover’s business model in February, leveling some serious allegations.

The business model doesn’t seem inherently flawed, and operating metrics are a testament to that. So no harm, no foul there.

However, when you put the numbers against a stable performer like UnitedHealth, the company starts to suffer in comparison. Last year, UNH grew sales and EPS at 9.1% and 20.8%, respectively. The gross margin is an excellent 25.6%, and return on equity stands at 23.5%, both figures higher than the industry average and S&P 500.

Better To Wait and Watch

CLOV stock has charted an interesting path so far. It has a large addressable market, and its web-based Clover Assistant application is a success with primary care providers (PCPs). With the U.S. investing approximately $36 billion in switching from paper to electronic health records (EHRs), the company is exactly the kind of stock that will do well moving forward.

However, on fundamentals, it unfortunately doesn’t make the grade. On almost every metric, competitor UnitedHealth is a better company to have in your portfolio.

If Clover gives us more reasons to believe in its growth story in a few quarters, a small position cannot hurt. For now, it’s better to stay away.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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