Mad Money

EHealth CEO buys stock amid short pressure: 'I couldn't resist it'

Key Points
  • EHealth CEO Scott Flanders bought 50,000 shares in the health insurance marketplace as the stock is under pressure from skeptical investors.
  • "Last time I bought shares they went up more than 10 times, so, I'm obviously optimistic," he said in a "Mad Money" interview.
  • Flanders laid out three moves the company is making to address its high churn rate that has alarmed investors.
VIDEO2:5102:51
EHealth CEO explains company's strategy to improve subscription retention rate

EHealth CEO Scott Flanders, who recently bought tens of thousands of shares in the health insurance marketplace, told CNBC's Jim Cramer on Tuesday that he is confident about the company's future, despite the investment community's concern about churn.

Flanders, who has been at the helm of the digital outfit for more than four years, earlier this month added 50,000 shares to his portfolio at a strike price of $71.54 per share, boosting his stake in the private health insurance exchange by almost 8% to more than 703,000 shares.

"It was a great value. I couldn't resist it," he said in a "Mad Money" interview. "Last time I bought shares they went up more than 10 times, so, I'm obviously optimistic."

Flanders is upbeat, notwithstanding the investors who lost interest in the stock after the company reported earnings in late July, sending the share price down more than 40% to the mid-$60s earlier this month.

While eHealth reported a 35% increase in revenue, beat analyst earnings estimates in the second quarter and raised guidance for the current year, the company posted a high churn rate for Medicare Advantage customers, to shareholders' alarm. "Churn" refers to the rate at which customers end a subscription and stop doing business with the company. Retaining clients is a critical component for companies whose revenue depends on customer subscriptions.

As of the end of June, eHealth estimated having a total membership base of 1.1 million, up 15% from a year ago.

The big sell-off also came months after investment firm Muddy Waters Research revealed it had taken a short position in eHealth, criticizing the company's accounting practices, growth stability and churn rate. A short position is a bet against a stock.

EHealth had a short interest of just under 10% as of Tuesday's close, down from 10.31% in mid-April but up from 8.43% in June, according to Factset. Flanders, however, believes much of the company's success was "lost in the noise around the churn dynamic."

When asked what the company was doing to reverse course — the churn rate spiked to 42% last quarter, Flanders signaled that executives shared the same concern.

"When we saw churn tick up late in the second quarter, we jumped on it. We were fortunate that we were working with Activate" who said "90% of it is due to our own inactions," he said.

Flanders said the company is now focused on three goals: hire more internal agents, tie workers' compensation to retaining members and form a retention team.

"On [the retention team], we were slow. Our competitors have had retention teams for several years, and I fully admit: we were focused on growth," he said. "There's no question if the chart continued to escalate, it would undermine our business model. So we're taking it very seriously."

EHealth shares rose 1.7% to $76.28 on Tuesday.

VIDEO7:3307:33
EHealth CEO addresses churn rate concerns, says he couldn't 'resist' buying shares

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

Want to take a deep dive into Cramer's world? Hit him up!
Mad Money Twitter - Jim Cramer Twitter - Facebook - Instagram

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com