The Herbalife “Slugfest”

In my opinion, the most interesting (and entertaining) story in equity markets is the current Herbalife story.

Herbalife is a US based producer and distributor of diet shakes, vitamin pills etc.

Looking at the chart, one can see that until early 2012, Herbalife was one of the “hottest” stocks out there:

Herbalife went public in December 2004 at a price of 14 USD per share. Including a stock split, the stock returned a phenomenal return of ~ 30% p.a. until the end of 2011.

Earnings per share rose more than 10-fold from 0.47 USD per share to more than 4.80 USD in 2011. During the “financial crisis”, the stock suffered but then quickly went back into outperformance mode.

The first “crack” in the success story appeared, when David Einhorn personally dialed into the conference call on May 1st 2012 for the first quarter and started to ask some weird questions.

Two weeks later, when Einhorn spoke at the annual Ira Son conference, the stock bounced back 20% because Einhorn didn’t mention Herbalife. So far I didn’t find out if Einhorn is still short.

The next step in the story is well known, the epic presentation of Bill Ackman why Herbalife is a Pyramid scheme. To reinforce his point, he even set up a dedicated website about his Herbalife short thesis. For Ackman, this is not his first short battle. There is even a book (by the way highly recommended) about his several year long fight against the US mortgage insurers, called “The confidence game”:

However, pretty soon after his presentation, some quite savvy investors and bloggers pointed out some weaknesses in Ackman’s presentation, especially the claim that the Herbalife “scheme” is illegal and the US regulators will have to shut the company down.

One of the first was blogger Kid Dynamite and one of my personal favouritesm, blogger and hedge fund manager John Hempton.

Like sharks smelling blood, some other “famous” hedgefund managers joined the party, most notably Dan Loeb’s Third point which actually took a massive 8% long position in the company. Yesterday, even “activist” legend Carl Icahn came out swinging against Ackman, disclosing a long position in Herbalife.

So this is quite an interesting situation:

On the one side, we have some of the brightest “new generation” HF managers David Einhorn and Bill Ackman against well respected “activists” like Dan Loeb and Carl Icahn as well as extremely clever bloggers like Kid Dynamite and John Hempton.

Last Thursday, Herbalife held an investor day, trying to take on Ackman’s acusations. I found the Herbalife presentation rather unconvincing.

My advice on this:

If you are not a famous investor who can move markets with a presentation, STAY OUT OF THIS !!!!!

Otherwise you will end up like this poor guy, who “joined” Bill Ackman just at the wrong point in time:

The Herbalife story is the proverbial “hot potato” investment one should just enjoy and watch (and learn) instead of joining.

Personally, I think that Loeb and Icahn are only in for the quick rebound and long term Ackman will most likely come out with a nice profit, but I wouldn’t really bet on this, as you might be killed (or squeezed) in the meantime.

So get your popcorn, lean back and enjoy !!!

P.S.: For anyone more deeply interested in “multilevel marketingg companies”, there is a very good detailed post at Seeking Alpha.

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