valuebeacon

Herbalife Under the Microscope

In Short selling on January 31, 2014 at 2:16 pm

Bill AckmanIn my last blog post, I wrote all about Bill Ackman’s $1B bet against Herbalife. Ackman heads Pershing Square Capital Management, an $11B New York hedge fund. In December of 2012, Ackman publicly asserted that Herbalife, a multi-level marketer with $4B in revenue, is a pyramid scheme.

What has happened since then?

Well, quite frankly, Herbalife has done really well despite the negative press. 2012 sales and profits were up 18% and 12% respectively over the prior year. That’s really impressive growth for a fairly large business.  Also, legendary financier Carl Icahn announced his support for the company and put two of his people on the board. All of this has caused Herbalife’s share price to rise rapidly from around $30 in December 2012 to around $80 in January of 2014.

For a short seller, this share price rise is incredibly painful. But Bill Ackman hasn’t taken it lying down. He has spent the last year on the offensive trying to convince the world that he is right. He appeared to be losing the battle – until now.

Just this month there have been a number of new developments in the story. A few weeks ago, China opened an investigation into Nu Skin Enterprises Inc (NYSE: NUS) which sells personal care products and nutrition supplements following claims by a local newspaper that the company was operating a “suspected illegal pyramid scheme.”  This news raised concerns for Herbalife as the company operates a similar business model.

Then, last week, prominent U.S. lawmaker, Senator Edward J. Markey, Democrat of Massachusetts, sent letters to federal regulators urging them to investigate Herbalife. “I have seen reports from Massachusetts residents that suggest Herbalife is a pyramid scheme,” Mr. Markey wrote in letters to the SEC and FTC.

And this week, the New York Post reported that the Canadian Competition Bureau has begun a formal investigation into pyramid scheme complaints against Herbalife.

So Mr Ackman’s hard work and persistence might actually be paying off. And with a share price above the point where Ackman made his short bets, right now might be the ideal time to get into the bet against Herbalife. But you better have a strong stomach.

Key dates:

  • Summer 2011 – Indago Group – a boutique investment research firm pitches Pershing Square’s Bill Ackman on the idea that Herbalife might be a pyramid scheme
  • 2011 and 2012 – Pershing Square analysts Shane Dinneen and Mariusz Adamski conduct in depth research on Herbalife
  • May 1 2012 – David Einhorn of Greenlight Capital starts asking scary questions on the HLF Q1 conference call
  • December 20 2012 – Bill Ackman gives a 3 hour presentation denouncing Herbalife at a specially held session of the Ira Sohn investment conference
  • January 9 2013 – Dan Loeb of hedge fund Third Point LLC files a report with the SEC disclosing that he has purchased an 8.24% stake in Herbalife
  • February 14 2013 – Carl Icahn, legendary financier disclosed a 12.98% stake in HLF
  • February 28 2013 – Carl Icahn adds 2 of his people to Herbalife’s board
  • January 17 2014 – Chinese regulators announce a probe into the business practices of Nu Skin Enterprises, a multi-level marketer
  • January 23 2014 – Prominent U.S. lawmaker, Senator Edward J. Markey, Democrat of Massachusetts, sent letters to federal regulators urging them to investigate Herbalife.
  • January 28 2014 – New York Post reports that Canada’s Competition Bureau launches a formal inquiry into pyramid scheme complaints made against Herbalife

Links

Ackman’s Losing Bet on Herbalife Looks Up After Chinese Probe
http://www.businessweek.com/articles/2014-01-17/ackman-s-losing-bet-on-herbalife-looks-up-after-chinese-probe

Canadian regulator probing Herbalife
http://nypost.com/2014/01/28/canadian-regulator-probing-herbalife
Markey Calls for Investigation into Herbalife Business Practices
http://www.markey.senate.gov/news/press-releases/markey-calls-for-investigation-into-herbalife-business-practices
China’s Attack on Nu Skin Is Terrible for Herbalife and Usana
http://www.fool.com/investing/general/2014/01/24/chinas-attack-on-nu-skin-is-terrible-for-herbalife.aspx

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: