Stocks to sell

Clover Health (NASDAQ:CLOV) stock is up 57% in the last month. The price action highlights the uncertainty of investing in celebrity SPAC (special purpose acquisition company) plays.

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Bit of background here. Venture capitalist and resident SPAC king Chamath Palihapitiya helped Clover, which sells Medicare-backed insurance plans, to go public through a $3.7 billion deal with a special purpose acquisition company. It is just one of the many deals Chamath has executed over the last few years, utilizing the once-obscure reverse-merger method.

Last year, the popularity of SPACs skyrocketed. Companies that found the traditional IPO (initial public offering) process cumbersome looked to debut through these investment vehicles.

That much makes sense. But the resultant investment behavior does not.

SPACs quickly became the hottest investment in town. However, they created a boom-and-bust cycle that passive investors detest. But hey, we are living in the age of the retail trader.

That is precisely why, despite massive overvaluation concerns, Clover remains a favorite among retail traders. It’s a decent enough company, looking to shave off some market share from larger competitors such as UnitedHealth Group (NYSE:UNH) and CVS Health (NYSE:CVS).

Its proprietary CA platform is interesting, and there is enough here to warrant attention. But it’s not enough to command a market capitalization of $4.75 billion.

The problem with meme stocks like CLOV is that Reddit users do not care about fundamentals. In fact, they are vocal about it. So, when you value an entity that has gotten a big lift from Redditors, it is important to ask yourself if you are overpaying for a business.

Because at the end of the day, fundamentals do matter.

CLOV Stock: Another Reddit Darling

Clover Health and other meme stocks share a lot of connecting tissue. For one, much like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC), the health insurance startup has a high short interest. As I write this, the short-interest percentage of shares outstanding is 10.11%, which is not quite as high as GME and AMC, but still considerable.

A significant percentage of Clover shares are being shorted by investors betting against it. This shows sentiment ¡s negative, so it should automatically mean that investors should stay away. Well, not exactly.

As we know, the more than 10 million members of Reddit’s r/WallStreetBets community have gotten Wall Street’s attention in 2021. And they are honing in on stocks with a high short percentage to spank the hedge funds and make money along the way.

Hence, even if you sell your stake in CLOV stock, there is no guarantee it cannot make waves moving forward. However, one thing is for sure: It’s not worth the price multiples at which it is trading at the moment.

Earnings Performance

Clover Health reported mostly underwhelming earnings performance in the first quarter of the year. Revenue grew just 18%, a far cry from the previous quarter, which saw a top-line increase of 66.1%.

Its cost of revenue as measured by MCR (medical cost ratio) is at 107.65% because of Covid-19-related claims. Still, per the company’s own assessment, the figure would drop to just 95.4% if we exclude this line item. So that is a key figure to watch out for as Clover continues its journey to become profitable.

Selling, general and administrative (SG&A) expenses continue to be very high relative to revenue: 40.6% for the latest quarter. Ultimately, the high MCR and high SG&A margin resulted in a worsening of operating profit, leading to a longer time period before the company can turn a profit.

The Clover Assistant platform has done well to penetrate established markets where it had to face off against more established peers. However, slower projected revenue growth and high price volatility are not what growth-oriented investors ideally want in their portfolios.

Hard Yards

Clover Health, similar to AMC and GameStop, is now trading at an unrealistic valuation. Therefore, it’s important to exercise extreme caution if you are contemplating investing in CLOV stock.

A short squeeze may or may not happen, but this is an extremely risky stock, considering the bubble can burst any day. If you invested in this one at some point before the Reddit crowd gained control, it is time to count your blessings, take your profits and exit your position.

On the date of publication, Faizan Farooque 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.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in 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. Faizan does not directly own the securities mentioned above.

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