Clover Health: Run for the Hills, Says Bank of America

Despite the high volatility, it’s been a positive week for investors in Clover Health Investments (CLOV), but it’s ending in a downgrade to Sell from Bank of America.

From Monday’s opening price through Wednesday’s intraday high of $28.85, Clover stock appeared to be on track to triple in share price by week-end. But enthusiasm for the meme stock peaked early in the morning hours of Wednesday, and fell steeply all day long. Then, in a real “kick ’em when they’re down” moment, Bank of America stepped in Thursday morning to downgrade the stock from “neutral” to “underperform” (i.e. sell), assigning a $10 price target. This figure suggests shares will decline ~34% over the next 12 months.

So why did Bank of America downgrade Clover? Analyst Kevin Fischbeck explains:

“After the recent spike in CLOV, we are downgrading [because] the company is now trading at a 70% premium to ALHC [its closest comparable stock] despite a similar growth profile and lower near term margin trajectory.” Although the analyst believes that Clover is likely to outgrow the Medicare Advantage market as a whole, it may not grow 70%-pricier-than-the-competition fast. Simply put, the current growth trajectory, as Fischbeck estimates it, doesn’t justify the premium price that Clover stock fetches after its run-up.

In addition to the valuation argument, Fischbeck also has concerns about the business proper: Company filings, says the analyst, “gave multi-year guidance on membership growth for both” Medicare Advantage and Direct Contracting. However, Clover cut its guidance for 2021 Medicare Advantage growth in its Q4 2020 earnings report, explaining that the pandemic hurt sales. Then, in Q1 2021, the company cut estimates for Direct Contracting as well.

Although Fischbeck accepted Clover’s explanations for both cuts, calling them “completely understandable,” the cuts still weren’t good news, and the analyst complained that the relatively abrupt change in guidance “leaves us with low visibility into the outlook” for the company.

On the positive side, Fischbeck said he has hopes that the company will improve its Medical Loss Ratio this year by moving towards the lower end of guidance (When you’re talking losses, lower is good). He also hopes to see the company’s “star rating,” which show “how good a job our plan is doing” on a five-point scale in terms of member satisfaction and effectiveness of treatment, improve to as high as a 3.5 score. This is the number Clover says it is hoping to achieve “long term,” and a score that “would help validate the [company’s business] model” in Fischbeck’s opinion. Neither of these eventualities, however, is assured at this point, and the analyst’s downgrade to “underperform” suggests he’s perhaps not entirely confident that these positives will, in fact, be achieved.

In the meantime, the company continues to lose money, and Fischbeck warns that Clover could lose as much as $0.70 per share this year (59% more than most analysts are projecting), and $0.34 next year — twice as much as the forecast.

If he’s right about that, selling the stock now might actually be a good idea. (To watch Fischbeck’s track record, click here)

Overall, Wall Street is evenly split on this stock. CLOV shares have received 1 Buy, 1 Hold, and 1 Sell rating in recent weeks, making the analyst consensus view a Hold. Shares are priced at $14.89, and the average price target of $9.67 suggests ~35% downside from that level. (See CLOV stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.