Eargo is a No Go

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Jonathan Heller is a big fan of double-net stocks, but he will drop a company that had previously outperformed.

“Recently, I found a surprise in one of my deeper value screens, in particular, ‘double-nets,’ Heller recently wrote on Real Money, current asset value, or NCAV. is a relatively small multiple of current net assets, and over the years this universe of companies has been a fertile hunting ground for would-be buyers. ”

The company that appeared on Heller’s screen is Eargo Inc. (HEAR) , which saw its share price drop significantly after some bad news.

“I was surprised to see the recent high-flying Eargo Inc. appear on the double-net list, trading at just 1.75x NCAV,” Heller said. “The hearing aid company went public at $ 18 a share less than a year ago, closed its first day of trading at $ 33.68, then rose to nearly $ 77 in early February of that year. Eargo briefly reached cult stock status. It’s been declining since, mainly due to mixed results, and stocks were trading at a low of $ 20 last week. “

Then a bomb hit EAR last week, knocking the title down.

Eargo revealed in 8-K file that he was told “he was the target of a criminal investigation by the United States Department of Justice (the” DOJ “) into insurance claims that the company has submitted on behalf of its clients covered by federal employee health plans, ”Heller said. “This news caused stocks to fall 68% last Thursday; they closed Tuesday at $ 6.84. “

With an investigation underway, Eargo will not be providing guidance for this exercise, and analysts covering the name have lowered it and lowered price targets. It’s a major red flag for Heller.

“As much as I enjoy jumping in the trash for companies that the market has perhaps punished too much, there is just too much uncertainty with AEOI,” he said. “There are not enough details available to know where this situation is going, how long will the investigation take and what the outcome will be. This is a case where the fundamentals, namely extremely good valuation market in terms of NCAV, are overshadowed by the circumstances. There is just too much uncertainty here for my blood, at this point, anyway. “

“This is a time when investors need to be careful not to believe the stock is cheap just because it once traded at $ 75 and now trades below $ 7,” he said. added.

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