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  1. Home
  2. / Investing
  3. / Stocks

Eargo Hits Investors With a Bombshell, Ergo I'll Stay Away

The hearing aid company's shares fell on word that it is the subject of federal investigation, but just because the stock is cheap doesn't make it a bargain.
By JONATHAN HELLER
Sep 29, 2021 | 10:00 AM EDT
Stocks quotes in this article: EAR

As I mentioned in Monday's column, there was quite a surprise within one of my deeper-value screens, in particular, "double-nets." That's a homegrown search for companies trading at between 1 and 2 times net current asset value, or NCAV. That's a relatively low multiple of net current assets, and over the years this universe of companies has been fertile hunting ground for acquisition candidates.

However, I was surprised to see recent high-flyer Eargo Inc. (EAR) appear on the list, trading at just 1.75x NCAV. 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 by early February of this year as Eargo briefly attained cult-stock status. It has been downhill ever since, due primarily to mixed earnings results, and shares were trading in the low $20s last week.

Then a bombshell hit after the market closed last Wednesday. Eargo disclosed in an 8-K filing that it had been informed "that it is the target of a criminal investigation by the U.S. Department of Justice (the "DOJ") related to insurance reimbursement claims the Company has submitted on behalf of its customers covered by federal employee health plans." That news sent shares down 68% last Thursday; they closed Tuesday at $6.84.

As a result of the investigation, Eargo will not be providing guidance for this fiscal year, and analysts covering the name have been downgrading it and reducing price targets.

As much as I like to dumpster dive for companies that the market may have overly punished, there is simply too much uncertainty in the case of EAR. There are not enough details available to figure out where this situation is headed, how long the investigation will take and what the outcome will be. This is a case where the fundamentals, namely the extremely cheap valuation in terms of NCAV, are trumped by the circumstances. There is simply too much uncertainty here for my blood, at this point, anyway.

Here is also where investors need to be careful of not falling into the mindset that the stock is cheap simply because it once traded for $75 and now trades for less than $7.

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TAGS: Litigation | Investing | Stocks | Consumer | Health Care Equipment & Services | Real Money

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