One I'm Considering - EHTH

By now, most people cringe when they hear the term 'health insurance'. Whether it is enrolling in your company's benefit plan, or obtaining health insurance on your own, confusion and apprehension generally accompany the application process. One company that is trying to smooth this process is EHTH. But it's having a bumpy ride.

This company already has one investor challenge facing it, namely, the analyst from Oppenheimer, who so dislikes the firm that he recently said, "We can't downgrade EHTH, because we already have an 'Underperform' on it, but we would if we could." Shares have actually fallen close to the $12 price target this analyst has on the stock. EHTH is also struggling against the cap the current healthcare reform has put on administrative costs and profits, which should have an impact on commissions. So, how can the company succeed?

Well, fundamentally, this company has almost everything going for it. First, half of the current stock price is made up of cash. As the company is net profitable and a cash-burn rate is not a concern, each share purchased at the current price consists of 50% cash and 50% for the business. I believe it can sustain this level of profitability, even if it is not growing tremendously at the moment. EHTH has some of the highest gross margins in the business, clocking in somewhere in the mid-90% range.

Even if growth stagnates while insurance companies adjust to the new healthcare reform, EHTH should be able to increase its cash position by 10% per year for at least the next two years. So, even though the current P/E is around 20x, with half the share price in cash, an investor is only paying a 10x P/E based on price net of cash. The company has no debt weighing it down, so with this level of cash and profitability, the idea of a buyout grows increasingly likely as each day passes.

The share price could also see a rapid boost from the fact that almost 10% of the share float is short right now. In addition, the average trading daily volume is only 300,000 shares. These two things together mean that if shorts were to cover all their shares based only on an average trading day's volume, it would take seven full trading days of nothing but short covering to eliminate the short interest. Now, that is not likely, nor practical. However, it does indicate that a short squeeze is altogether possible.

The company's website is fairly easy to use and allows consumers to compare different health-insurance plans from many big-name carriers. The application process is fairly simple, and help is easy to obtain. In a world that is becoming more web-centric by the day, EHTH has a huge consumer base that it has not even begun to touch yet. The idea of making health insurance available to every person living in this country, regardless of restrictions on commission, should prove a huge benefit to a company like EHTH.

It would be very interesting to see if it could even evolve its business into something of a PCLN model, where you have flat fee policies, or can bid for your own. They could have Homer Simpson as their spokesperson. If you were approved, he could yell, "Wahoo!" If you were denied, you would hear a big, "Doh!" Okay, well, maybe not. But health-insurance is stressful enough, so why not add a little fun?

Overall, I think these shares could very easily push higher based on valuation, a short squeeze, or even a buyout. In any of these cases, EHTH could surge 50% from these levels to test its current multiple top around $19 per share. Unfortunately, the shares could also flounder in the low teens or even lower while the market shakes off some rust and doubts persist about the implications of the new healthcare reform.

However, this is one stock that could significantly move to the upside before you have a chance to climb on board. Given the huge cash position and niche it currently occupies, I think the downside should be limited, making this one of the best long shots I've seen since the market bottom......