As the Reddit-fueled meme stock mania intensifies, it seems that retail traders have now shifted their focus from AMC Entertainment Holdings (AMC) and GameStop Corporation (GME) to several new names that include Clover Health Investments, Corp. (CLOV) and The Wendy’s Company (WEN). The price of healthcare company CLOV’s stock jumped a staggering 109% on June 8 as amateur traders on social media platforms continued to drive rallies in heavily shorted U.S. stocks. Similarly, WEN’s shares surged nearly 26% to record highs on the same day after subreddit r/wallstreetbets forum’s post pitched the fast-food-joint as “the perfect stock” because of its signature products and “effective” social media presence.
However, CLOV’s shares have crashed into negative territory. The stock has lost 37.8% over the past five days. This reflects that the gains were not a result of financial performance and fundamentals, but merely social media attention. In contrast, WEN has been witnessing strong digital and store sales, and increasing demand for its premium food items. Since the company is both fundamentally and financially sound, it could continue to see solid gains going forward.
While CLOV has gained 84.3% over the past month, WEN has returned 1.4%. In terms of past three months’ performance, CLOV is the clear winner with 55.2% gains versus WEN’s 10.2% returns. But which of these stocks is a better pick now? Let’s find out.
Last month, Scott+Scott Attorneys at Law LLP started investigating CLOV’s directors and officers for potential breaches of fiduciary duties to the company’s shareholders. Also, Lishitz Law Firm, Robbins LLP, and Bragar Eagel & Squire, P.C have recently announced an investigation into the company on behalf of its long-term stockholders. In April, class action lawsuits were filed against the company by the Schall Law firm and the Klien Law firm, on behalf of its shareholders, for violation of federal securities law.
On June 15, WEN’s Wubba Lubba Grub Grub! and Adult Swim’s Rick and Morty joined hands for year two of their wide-ranging partnership. Under these partnerships, Rick and Morty fans can avail themselves of new show-themed mixes in more than 5,000 Coca-Cola Freestyle machines and a custom drive-thru experience on the series’ fifth season premiere on June 20. This partnership should bolster WEN’s brand value and increase its customer base significantly.
Recent Financial Results
In the first quarter ended March 31, 2021, CLOV’s net loss came in at $48.4 million, representing a 71.6% rise from the prior-year period. The company’s non-GAAP adjusted EBITDA came in at a negative $76.2 million, while its adjusted operating expenses surged 29% year-over-year to $61.9 million. Furthermore, its operating loss increased 347.2% year-over-year to $119.1 million.
During the first quarter ended April 4, 2021, WEN’s total revenues increased 13.6% year-over-year to $460.2 million, driven primarily by higher restaurant sales, an increase in franchise royalty revenue, and an increase in advertising funds. Its operating profit increased 70.6% from its year-ago value to $83.1 million. WEN’s net income came in at $41.1 million, compared to $14.4 million in the first quarter of 2020. The company’s adjusted EBITDA increased 35.4% from its year-ago value to $121 million.
Expected Financial Performance
CLOV’s revenue is expected to rise 21.7% in the current year, and 34.8% next year. The consensus EPS estimates indicate an increase of 49% in 2022 and 32% per annum over the next five years.
In comparison, analysts expect WEN’s revenue to increase 6.7% in its fiscal year 2021 and 2.5% in 2022. The company’s EPS is estimated to increase 50% in the current quarter, ending June 30, 2021, and 14.9% next year.
WEN’s trailing-12-month revenue is twice CLOV’s. Also, , WEN is more profitable with a 46.2% gross profit margin compared to CLOV’s 8.6%.
Also, WEN’s $389.56 million in cash from operations compares favorably with CLOV’s negative $174.19 million.
In terms of forward EV/Sales, CLOV is currently trading at 6.88x, 46.1% higher than WEN, which is currently trading at 4.71x. But WEN’s trailing-12-month Price/Book of 10.11x is 5.2% higher than CLOV’s 9.61x.
WEN has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system, while CLOV has an overall D rating, which represents Sell. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
In terms of Quality Grade, WEN has a B, which is consistent with its higher-than-industry gross profit margin. But CLOV has a Quality Grade of C, in sync with its lower-than-industry gross profit margin. While WEN has a C grade for Sentiment, CLOV has an F.
In addition to what we’ve highlighted, our POWR Ratings system has also rated both WEN and CLOV for Stability, Value, Growth and Momentum. Get all WEN ratings here. Also, click here to see the additional POWR Ratings for CLOV.
Even though shares of both CLOV and WEN soared on retail trading based on social media hype, CLOV’s weak financials make it a risky bet now. Conversely, WEN’s superior financials and solid fundamentals could help it maintain its rally. So, we believe WEN is a more attractive investment option than CLOV now.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the top-rated stocks in the Restaurants industry. Also, click here to see the top-rated stocks in the Medical – Health Insurance industry.
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CLOV shares were trading at $13.21 per share on Wednesday morning, down $0.56 (-4.07%). Year-to-date, CLOV has declined -21.23%, versus a 13.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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