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

Despite the excessive volatility, it has been a optimistic week for traders in Clover Health Investments (CLOV), nevertheless it’s ending in a downgrade to Sell from Bank of America.

From Monday’s opening worth by means of Wednesday’s intraday excessive of $28.85, Clover inventory gave the impression to be on monitor to triple in share worth by week-end. But enthusiasm for the meme inventory peaked early in the morning hours of Wednesday, and fell steeply all day lengthy. Then, in an actual “kick ’em when they’re down” second, Bank of America stepped in Thursday morning to downgrade the inventory from “neutral” to “underperform” (i.e. promote), assigning a $10 worth goal. This determine suggests shares will decline ~34% over the subsequent 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 prone to outgrow the Medicare Advantage market as a complete, it might not develop 70%-pricier-than-the-competition quick. Simply put, the present development trajectory, as Fischbeck estimates it, would not justify the premium worth that Clover inventory fetches after its run-up.

In addition to the valuation argument, Fischbeck additionally has considerations about the enterprise correct: Company filings, says the analyst, “gave multi-year guidance on membership growth for both” Medicare Advantage and Direct Contracting. However, Clover lower its steering for 2021 Medicare Advantage development in its This fall 2020 earnings report, explaining that the pandemic damage gross sales. Then, in Q1 2021, the firm lower estimates for Direct Contracting as effectively.

Although Fischbeck accepted Clover’s explanations for each cuts, calling them “completely understandable,” the cuts nonetheless weren’t excellent news, and the analyst complained that the comparatively abrupt change in steering “leaves us with low visibility into the outlook” for the firm.

On the optimistic aspect, Fischbeck mentioned he has hopes that the firm will enhance its Medical Loss Ratio this yr by transferring in the direction of the decrease finish of steering (When you are speaking losses, decrease is good). He additionally hopes to see the firm’s “star rating,” which present “how good a job our plan is doing” on a five-point scale in phrases of member satisfaction and effectiveness of remedy, enhance to as excessive as a 3.5 rating. This is the quantity Clover says it’s hoping to realize “long term,” and a rating that “would help validate the [company’s business] model” in Fischbeck’s opinion. Neither of these eventualities, nevertheless, is assured at this level, and the analyst’s downgrade to “underperform” suggests he is maybe not fully assured that these positives will, actually, be achieved.

In the meantime, the firm continues to lose cash, and Fischbeck warns that Clover might lose as a lot as $0.70 per share this yr (59% greater than most analysts are projecting), and $0.34 subsequent yr — twice as a lot as the forecast.

If he is proper about that, promoting the inventory now may really be a good suggestion. (To watch Fischbeck’s monitor document, click here)

Overall, Wall Street is evenly cut up on this inventory. CLOV shares have acquired 1 Buy, 1 Hold, and 1 Sell ranking in latest weeks, making the analyst consensus view a Hold. Shares are priced at $14.89, and the common worth goal of $9.67 suggests ~35% draw back from that degree. (See CLOV stock analysis on TipRanks)

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Disclaimer: The opinions expressed on this article are solely these of the featured analyst. The content material is meant for use for informational functions solely. It is essential to do your personal evaluation earlier than making any funding.

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