Stocks to sell

The party’s over once again for Clover Health (NASDAQ:CLOV) stock. A few months back, the insurtech company, and former SPAC (special purpose acquisition company), was a popular health care-related “story stock.”

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News of a Department of Justice (DOJ) investigation fueled a big change in investor’s opinions about it. But starting in the spring, a new angle emerged: its appeal as a short-squeeze target. The meme stock phenomenon seemed to be on the wane. Yet given its high short interest, many saw it as a possibility.

As seen a few weeks back, this did play out. Starting in late May, the Reddit set came back into “meme stocks” in a big way. Given its high short-interest (around 28% of float, as of May 28), it was no surprise this stock saw a short-lived parabolic run from around $7 to as much as $28.85 per share.

But now that trade has come and gone. Investors with a “bird in hand” philosophy cashed out their fast profits. But those late to the game, who got in at $15, $20, or even $28.85 per share are sitting on big losses. And with more pointing to it falling back to its prior price levels (around $7 per share) what’s the best move? At nearly $14 per share, stay away if you don’t own it.

And if you do? It’s high time to cash out.

CLOV Stock, its Scandal, and its Short Squeeze

Clover Health is one of many high-growth companies backed by SPAC impresario Chamath Palihapitiya. Palihapitiya’s ambitions to become the next Warren Buffett took a hit following the “SPAC Wipeout.” Yet, with the latest company he’s taken public, SoFi (NASDAQ:SOFI), holding up well after its deSPACing, his clout could be trending up once again.

Even so, don’t count on this rebounding clout to counter the still-standing red flags. There’s a reason why short sellers pounded on CLOV stock starting in February. As vocal skeptic Hindenburg Research reported that month, the company failed to disclose it was under DOJ investigation.

What’s the story behind this? It has to do with some of the tactics used to market its flagship product, Medicare Advantage plans.

The DOJ is taking a look at alleged kickbacks and undisclosed third-party deals, as well as some of its marketing practices. Investigations may be par for the course in this industry, as seen from controversies surrounding “old school” names in this space. As a Motley Fool commentator recently discussed, chances are (at worst) Clover will face only a fine, if the allegations prove true.

In the end, Hindenburg’s bombshell may prove to be small potatoes. But there are other factors that could harm the stock, sending it back toward its past lows.

Clover’s Prospects are Questionable

Concerns over the DOJ investigation may be overblown. Yet the company’s prospects still appear questionable. This points to the stock, while down big from its highs, falling back to the single digits. Why? Namely, when weighing its valuation, against recent results and projected growth, things fail to add up.

This was the key rationale behind BofA analyst Kevin Fischbeck’s recent downgrade of CLOV stock. Cutting his rating from the equivalent of “hold,” to the equivalent of “sell,” Fischbeck cited the stock’s valuation premium to peers like Alignment Healthcare (NASDAQ:ALHC), as well as the company’s lukewarm quarterly results as the key reasons behind his downgrade.

With Clover’s big pullback post-squeeze, the valuation discrepancy between it and Alignment has come down. But it’s still trading at a premium. As for the second issue? Revenue projections for 2021 and 2022 (21.8% growth, followed by 29.9% growth) look promising.

It may be a long time before CLOV stock scales up to profitability. As InvestorPlace’s Faizan Farooque recently discussed, the company’s medical cost ratio is over 100%. Not only that, its overhead cost remains disproportionately high as well.

Putting it simply, Clover has plenty of hurdles to climb before it’s out of the red. If it fails to overcome these challenges? Investors are going to be less willing to assign it a premium valuation.

The Bottom Line

The short squeeze earlier this month may have reinvigorated excitement for CLOV stock. But the underlying story hasn’t changed. It’s still contending with the DOJ investigation. Given its high operation costs, there’s still the question whether the company can scale to profitability.

Its connections to Palihapitiya, and the perceived “disruptive” nature of its business model may help support its premium valuation. Yet, for how long?

In short, there’s little reason why CLOV stock should remain priced well above its pre-squeeze levels (around $7 per share). Whether you’re still sitting on gains, or are underwater on your position, the answer’s clear. It’s time to move on.

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.

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