Capital Markets / Investor Relations in Two Minutes or Less
EHTH Short Case Study
My short attack on ehealthinsurance ($EHTH) represented a structural short attack initiated in the 2014 and 2015 timeframe. Hopefully, the simple case study allows management teams to better identify and understand what a particularly strong short attack looks like in reality.
Key Issues: There were four key issues that made EHTH attractive as a short
Exchange Hype: Investors were overly bullish on the platform and exchange technology because of the coming launch of Healthcare.gov.
Strategy Concerns: Investors were overlooking the true churn rate associated with the individual and family plan (IFP) business.
Technology Concerns: Investors thought that the company’s technology was connected to healthcare.gov, but there were issues.
Previous Interactions: In 2011, my team had concerns that management misrepresented some of the company’s work with Utah exchanges.
I initiated on the company with a negative Hold in June 2014. Given this was my first ever initiation, I felt that a Sell would not be approved by research management. My view was the company needed to stumble before I could go to a Sell rating.
What Triggered the Short Attack?
The company missed 2Q14 earnings, which drove a 50% decline in share price from the high $30s to the low $20s. Based on the earnings call and my call back with management, I felt that investors were wrong to be bullish on each of the four key issues outlined above.
What Were the Irrefutable Premises?
The company was not going to fulfill the investor hype of it being the Amazon.com of healthcare.
My research uncovered that the company was not truly connected, or going to benefit from the launch of healthcare.gov.
Investors felt that the launch of Healthcare.gov was going to be a boom for eHealth. My concern was around the technology.
In reality, Healthcare.gov was a negative catalyst for eHealth because it drove churn of the IFP business significantly higher than anyone anticipated.
In December 2014, I was at my dentist’s office, where the dental hygienist regaled me about being kicked out of her health plan because of Obamacare. The exchange was great anecdotal evidence that my thesis was likely correct.
Stock Performance: The stock went from $38 to $22. I went to Sell, and the stock ran to $25 to $28. The shares dropped to $9 when the company pre-announced a 4Q14 earnings miss.
Subsequently, the shares went from a low of $7 to $150, so there is always hope to recover.
Resolution: The Company resolved the situation in two ways: (1) a management change, and (2) a strategy change away from the IFP business toward Medicare / Medicaid.
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