Clover Health Investments (CLOV -3.02%) went public earlier this year through a merger with a special purpose acquisition company. But things haven't been going well, and year to date, the stock is down more than 40% (the S&P 500 has risen by over 6%). A lot of that bearishness is likely due to a short-seller report that criticized the medical insurer's business and questioned its practices.

However, the business is growing at a high rate, and with its share price coming down significantly, now may be a good time to invest in the stock. Is Clover Health an underrated buy that is worth adding to your portfolio, or are there too many problems and headaches surrounding the business to make it a worthwhile investment?

Doctor reviewing test results with a patient.

Image source: Getty Images.

Hindenburg report makes many startling claims

On Feb. 4, Hindenburg Research released a scathing report about Clover Health, calling it a "broken business." It alleged that a near four-month investigation into the company uncovered such issues as: kickbacks and third-party deals; overbilling of Medicare (the company provides Medicare Advantage plans); and doctors' dissatisfaction with the company's technology, the Clover Assistant. One doctor called it "embarrassingly rudimentary."

Those are troubling claims, but investors always need to be cautious with short-seller reports, as they can sometimes rely on faulty information. In Hindenburg's research, it collected information from a variety of sources, including former employees and competitors -- people who may not have the nicest things to say about a company in the first place. Short-seller reports are often biased, because the company or individual releasing the report stands to benefit from a drop in the share price. However, on its website, Hindenburg stated that it has no position either long or short in Clover Health.

Clover Health dismissed the allegations made by Hindenburg but said the Securities and Exchange Commission (SEC) is now involved, and the company believes this is a result of the report.

The problem with these allegations is that for investors, it can be difficult to know where the truth is -- and unless the SEC comments on the matter and provides some clarity, this will weigh on the stock. If the company is involved in kickbacks or overbilling Medicare, that can easily help inflate its top line. And unless the SEC puts those concerns to rest, investors will be left wondering if Clover Health's sales numbers are as good as they appear.

Clover Health reports 46% sales growth in 2020

On March 1, Clover Health released its year-end results for this past year. Sales of $672.9 million in 2020 were up 45.5% from the previous year, and it achieved similar growth numbers in the fourth quarter (ending Dec. 31). The medical insurer also says that the number of its members managed by physicians who use the Clover Assistant totaled 32,400 (56% of all members) -- representing a year-over-year increase of 43%.

For the full year, the company reported a loss from operations of $92.7 million -- half the size of the $183.2 million operating loss it incurred a year ago. Its operating expenses of $765.6 million rose by just 18.6%, far below its rate of sales growth. That is a good sign for investors because it means a lot of top-line growth could help Clover Health eventually get to profitability. 

If the short-seller report were true and the company were as shady and dishonest as Hindenburg suggests, I would have expected to see more waste and bloated expenses on its financials, with management lining their pockets with the added revenue. But that doesn't appear to be happening, or at least there isn't a glaring sign of it on the earnings report. That isn't proof the short-seller report is wrong, but investors should see it as a positive nonetheless. Oftentimes fast-growing companies see their expenses skyrocket along with revenue.

Should you invest in Clover Health?

At a market cap of $3.6 billion, Clover Health's stock is trading at a multiple of 5.4 times its sales over the past 12 months. That is a bit high compared to the average healthcare stock in the Health Care Select Sector SPDR Fund, where investors are paying 1.7 times revenue. 

However, with high-growth businesses, investors are often willing to pay a premium. But until and unless the question marks surrounding its business go away, it will be difficult to know whether Clover Health is as impressive as it looks on paper.

For now, this is a stock I would avoid, as it isn't cheap compared to the typical healthcare stock, even after a considerable decline in price this year. And if the SEC doesn't clear the company of any wrongdoing, further losses could be on the way.