On Tuesday I wrote about thesis creep from the short sellers in Health Insurance Innovations (HIIQ – USA). At the time, I thought I was paying around five times earnings to buy a profitable short-term medical insurance (IFP) broker which was pivoting into the much more lucrative Medicare Advantage business. Furthermore, I felt that I knew why the shares were undervalued—namely an active and aggressive FUD campaign (fear, uncertainty and doubt) orchestrated by short-sellers, yet lacking analytical rigor.
Q3 2019 hedge fund letters, conferences and more
Today, I woke up to a recent press release saying that the company was going to exit the IFP market and use the cash flow from run-off to get more aggressive in building out their Medicare business. While this may very well be the right strategic move for the company, HIIQ is now a very different business from what I was buying earlier in the month. I thought I was buying a cheap earnings stream that would slowly trail off and be replaced by a rapidly growing Medicare business. Instead, there’s a full-stop on this earnings stream and a hope that management can execute on their Medicare business. Early results seem to imply that they are more than capable of using their lead generation to excel in this business—however, that’s not what I bought earlier this week. More importantly, there is no longer the valuation safety from recurring earnings in the IFP business.
Upon a bit of reflection, it would be rather hypocritical of me to criticize short-sellers for thesis creep while then doing the same thing myself on the long side as the story changes.
I suspect HIIQ works out just fine. Even on their existing 57,000 policies, it seems cheap compared to recent transactions that were done at admittedly nose-bleed valuations. That said, I’m a disciplined investor and I refuse to buy blue sky that I cannot quantify. I want to buy high quality businesses at low single digit forward multiples on earnings, barring that, I’m willing to look at substantial discounts to verifiable asset values. If I cannot get the safety of recurring earnings or a balance sheet, how do I quantify my downside? If the downside is amorphous, all I have is risk. My discipline in only buying unusually cheap stocks is what protects me from inevitable mistakes. If I don’t follow my own rules, then I’m gambling and not investing.
Therefore, I have sold all my HIIQ today. I made a few percent gain on what was a small position. I still have a few puts that I wrote and I intend to let them burn off. I can’t fault anyone who wants to stay with HIIQ. I genuinely think it works. I also know that rules-based investing is how you outperform. When the thesis changes, get the hell out.
Disclosure: Funds that I control are short HIIQ puts in various durations and strikes
Article by Adventures In Capitalism
