I now jokingly refer the small cap sector to as the small crap sector. This is not to insult the companies within it, but rather to describe the price action plaguing their stocks. The sellers have been punishing the cohort for months while the S&P 500 and the DOW recently broke records. Among these small-cap picks is Clover Health (NASDAQ:CLOV) stock. However, there is a bit more to the CLOV stock problems than just being a small cap.
Wall Street is reversing the extreme love it had for these stocks out of the pandemic. The inverse move is proving to be as violent as the rise. Consequently, there are no sustainable bids for Clover Health. It is not only part of the small crap posse, but also a special purpose acquisition company (SPAC).
My conclusion today is that at these levels, CLOV stock makes for a compelling trade. I am also making the distinction that it’s not a high-conviction investment.
The simplest argument for it is the support of the famous billionaire Chamath Palihapitiya. He brought the company public through the SPAC process. And as long as Chamath hasn’t given up on it, I bet that time is the missing ingredient. Eventually, the verdict will come out about it being a dud stock or a stud stock.
CLOV Stock’s SPAC Past
Stocks that came to market via a SPAC have developed a junky reputation. The perception is that Clover’s business model is not sustainable, and borderline fake. This by definition makes investment funds going into CLOV stock highly speculative.
Therefore, it is not a surprise that the company is finding difficulty holding support. What is shocking is the descent velocity without much upside along the way.
CLOV stock has failed to maintain any upside momentum since its incredible spike last summer. The stock skyrocketed to more than $28 per share, and today it is struggling to hold $3. That is an astonishing turn of events that makes it also suggest trades this low are like a lottery ticket. Call it a hail Mary trade with very little expectations.
I’ve already used terms that should make investing in CLOV stock sound like gambling. That’s not the obvious conclusion to draw about the company judging by its financials. The problem is that its profit and loss (P&L) statement is so young that it really doesn’t lend Clover Health the benefit of the doubt yet.
The Bottom Line on Clover Health
According to TradingView, Clover’s trailing 12-month revenues were $1.1 billion. That is a significant increase over the run rate from the year prior. The 2020 data was incomplete, therefore it’s more of a broad gauge than a penny-perfect comparison. The price-to-sales (P/S) ratio is astonishingly low at just barely over 1. Therefore, investors now don’t expect much from the stock.
Using simple logic and a bit of faith, I can see a thesis to go long with CLOV stock. Since it is actually doing business with the government with its Medicare Advantage plan, I can assume Clover Health is real enough for this purpose. It cannot be entirely fake, or else someone is going to jail in the end. The faith in CLOV stock could come after a few earnings reports, when investors can grow trust in the Clover potential.
There are also extrinsic factors that crippled CLOV stock last week. The headlines that hit Humana (NYSE:HUM) hard about Medicare cutting back spending bled into Clover Health as well. If there is bad news from company A, there will likely be sympathy moves in company B’s stock.
Also, last year, Clover’s management diluted the shares and hurt its own investors in the process. It’s important to have cash on hand, but they can’t repeat this strategy without upsetting investors. My conclusion is that CLOV stock is worth a shot if you’re not already long in the stock — but not with great conviction.
On Penny Stocks and Low-Volume Stocks: With only the rarest exceptions, InvestorPlace does not publish commentary about companies that have a market cap of less than $100 million or trade less than 100,000 shares each day. That’s because these “penny stocks” are frequently the playground for scam artists and market manipulators. If we ever do publish commentary on a low-volume stock that may be affected by our commentary, we demand that InvestorPlace.com’s writers disclose this fact and warn readers of the risks.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.