Stocks to sell

Although Clover Health (NASDAQ:CLOV) has great potential, allegations against the company by a research firm make CLOV stock too risky to buy or hold at this point.

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The allegations were made by Hindenburg Research in early February. Hindenburg has shorted stocks that it issued reports about it in the past. When it issued the report on Clover, however, it claimed that it was not shorting the company’s shares.

Hindenburg alleged that Clover is under active investigation by the Department of Justice. The agency, which has issued a request for information to the company, is probing at least 12 issues ranging from kickbacks to marketing practices to undisclosed third-party deals according to Hindenburg, citing documents that it had seen.

The firm stated that an “independent” Clover subsidiary offers seniors advice in selecting Medicare plans.

Citing former Clover employees, Hindenburg also alleged that much of Clover’s revenue is fueled by a brokerage firm controlled by Clover’s Head of Sales, Hiram Bermudez.

Finally, according to Hindenburg, former employees charged that “Clover’s software is primarily a tool” to help the company obtain more money from Medicare using irrelevant diagnoses.

In past columns about Luckin Coffee (OTC:LKNCY), I’ve noted that a number of companies that committed improprieties had managed to stay in business and do relatively well.

In general, I do believe that the government will likely not seek to bankrupt companies unless their entire business is fraudulent or they are materially harming citizens’ health and/or their welfare.

However, I do believe that regulators could look to severely punish and even bankrupt a company whose business model is based, partly or completely, on defrauding the government. Further, Hindenburg does appear to be alleging that Clover may be materially hurting some senior citizens.

Hindenburg’s Credibility and CLOV Stock

In the past few months, I’ve examined several reports or summaries of reports by Hindenburg. Although I think that sometimes the firm exaggerates the importance of its findings, especially in the case of Nikola (NASDAQ:NKLA), its statements do appear to generally be accurate.

After reviewing Clover’s lengthy response to Hindenburg’s report, I believe that the company did not dispute the most important allegations against it by the firm.

Specifically, Clover appears to have tacitly admitted and/or failed to dispute that it was being investigated by the Department of Justice and that its subsidiary claims to be independent but refers business to Clover.

Further, Clover did not directly dispute Hindenburg’s allegations about the percentage of its revenue that is allegedly “fueled” by the brokerage company partly owned by its head of sales. Clover admitted that its executive has a 50% stake in the brokerage firm.

Finally, on the crucial issue of whether Clover’s software helps the company obtain more money, Clover does not directly dispute the charge. Instead, it focuses on the idea that doctors can choose to disagree with the diagnoses produced by Clover’s software and will not be directly penalized by the company for doing so.

However, I can think of two possible reasons why doctors may not want to disagree very much with the diagnoses produced by the software.

First, if the software does tend to make suggestions that raise Medicare payments, the doctors themselves will likely make more money if they agree with those suggestions.

Secondly, Clover admits that it pays personal care physicians (PCPs) $200 per visit when they use its software.

“[T]his translates to roughly twice the traditional Medicare fees paid to PCPs for an office visit, more in line with fees paid to specialists,” according to Clover’s response.

I believe that PCPs could worry that they will lose the lucrative $200 payments if they disagree with Clover’s software too often.

Clover Has Tremendous Potential

Seeking Alpha columnist Jhon Idrovo reported that Clover’s software has been able to, on average, lower seniors’ out-of-pocket costs while giving “the substantial majority of its members” more “freedom of choice” than its competitors.

Finally, the columnist noted that the company’s membership has climbed at a compound annual growth rate of 27% since 2017, while enrollment in Medicare Advantage overall is continuing to increase quite rapidly.

Given these points, Clover’s top and bottom lines could indeed jump tremendously in coming years, making CLOV stock a big winner for long-term investors.

The Bottom Line on CLOV Stock

Hindenburg’s allegations against Clover seem to have some credibility. Further, I agree with the firm’s assessment that, because of its dependence on Medicare, the insurer could face an existential risk if the government determines that it has engaged in extensive, material wrongdoing.

After all,  the government could fairly easily eject Clover from the Medicare Advantage program, potentially dealing the company an existential blow in the process.

On the date of publication, Larry Ramer held a long position in Luckin Coffee. 

Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.