Is healthcare insurer Clover Health Investments (NASDAQ:CLOV) stock more than a meme play?
This is the fundamental question that both professional and retail investors are trying to answer after CLOV stock was targeted in late May by the meme stock crowd that congregates on the WallStreetBets Reddit forum. The share price was pushed up 117% in the span of three weeks.
Clover Health’s shares closed as high as $15.03 in mid-June. During intraday trading, the stock shot up as high as $28.85.
Today, the company’s stock is worth about $8.35 a share, nearly 40% below the peak it reached last month.
Now, Clover Health has to convince investors on Wall Street and Main Street that it is more than a flash in the pan meme stock and that its shares are worthy of sustained gains.
CLOV Stock and the King of SPACs
Being given the meme stock treatment was especially difficult for Clover Health Investments given that the company has only been publicly traded for six months.
Clover Health went public on Jan. 8 through a merger with a special purpose acquisition company (SPAC) called Social Capital Hedosophia that was run by well-known investor and entrepreneur Chamath Palihapitiyavia.
The SPAC deal valued Clover Health at nearly $4 billion.
Founded in 2014, Franklin, Tennessee-based Clover Health Investments is an American Medicare advantage insurer and uses data analytics to provide consumers with access to more affordable healthcare plans.
Today, Clover Health has nearly 500 employees and a market capitalization of $5.5 billion. Even before it became publicly traded, Clover Health was a popular name on the WallStreetBets site.
Palihapitiyavia is a well-known and popular personality on the Reddit message boards, with retail traders referring to him as the “SPAC King.” Palihapitiyavia’s involvement with Clover Health drew attention to the company.
Another aspect of Clover Health that attracted the interest of the retail investing mob was that the company’s stock was shorted (bet against) by a notorious Wall Street firm called “Hindenburg Research.”
Glibly named after the doomed Zeppelin that exploded in 1937, Hindenburg Research is an activist short-selling firm that generates reports alleging fraud and malfeasance at publicly traded companies.
This spring, Hindenburg Research shorted CLOV stock after claiming that the company was being investigated over its business and sales practices.
While no charges have been filed against Clover Health, the fact that the company’s stock had been shorted by Hindenburg Research was enough to mobilize the self-proclaimed WallStreetBets “apes” who moved to execute a short squeeze on CLOV stock and prove the experts wrong.
The retail investors pushed Clover Health’s share price up 50% immediately after Hindenburg Research’s report was posted online.
Executives at Clover Health found themselves caught in a battle between professional short sellers on Wall Street and do-it-yourself retail investors.
Russell 2000 Inclusion
SPACs and short sellers aside, Clover Health Investments has had some good news in recent months and the company does have some underlying fundamentals that should appeal to long-term investors.
Positive news came in the form of media reports that Clover Health will be added to the Russell 2000 stock index when it next rebalances itself.
While it has yet to be confirmed, inclusion in the Russell 2000 would be beneficial for CLOV stock as it would then be included in exchange traded funds (ETFs) and mutual funds that track the index and its performance.
In terms of fundamentals, Clover Health reported 18% growth in its number of healthcare insurance members, as well as a $200 million increase in its revenues, for its most recent fiscal quarter.
However, those accomplishments were overshadowed by the fact that the company reported an earnings per share (EPS) loss of $0.13, worse than the $0.11 loss that analysts had expected. Clover Health also revised down its forward revenue guidance, which also hurt the company’s stock.
Currently, 41.4 million shares of CLOV stock have been shorted, a record amount. A growing number of short sellers are betting that Clover Health’s share price will fall further from its current level of $9.32.
Wait on CLOV Stock
Clover Health Investments is a legitimate company that has been caught up in forces beyond its control.
While it is a real and substantial health insurance provider, Clover Health has been hit with a triple whammy of bad fortune.
First, it went public via a SPAC at a time when such deals are under increasing scrutiny and viewed as dubious on Wall Street.
Second, the company had the misfortune to be dragged through the mud and its stock shorted by notorious firm Hindenburg Research.
Third, CLOV stock has been treated as a meme stock and driven to unsustainable levels by the WallStreetBets hordes. All of this within six months of becoming a publicly traded company.
Investors should avoid CLOV stock, not because it is a bad company, but because it has had so much bad luck.
Add Clover Health’s shares to your watchlist and see how the stock performs in this year’s second half.
If the company can shake off its meme stock status and its earnings improve, then consider taking a position in the company in the New Year when, hopefully, Clover Health’s fortunes have improved.
Disclosure: On the date of publication, Joel Baglole 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.