HLF - Herbalife

[Guest rimm_never_sleeps]

"I am utterly convinced by everything in Bill Ackman's presentation except the final conclusion - that Herbalife's stock will collapse. I took a long position on Christmas Eve. I suspect that Herbalife is so profitable and so powerful they will see Mr Ackman's attack off - and the easiest way to do that is to buy back stock (and make the stock go up). Mr Ackman has given them the incentive to return their huge (but tainted) profits to shareholders (and I plan to be a recipient shareholder)."

 

Source: John Hempton

 

it will be an even better short if they use all their cash to support the stock.

[zippy1]

You got to love the title of the WSJ blog article.

Herbalife Fight: ‘Hedge-Fund Equivalent of Stalingrad’

http://blogs.wsj.com/marketbeat/2012/12/27/bet-against-ackman-some-hedge-funds-buy-herbalife-shares/?mod=WSJ_qtoverview_wsjlatest

[Hielko]

I also think Ackman is wrong: HLF isn't a zero. the main point of his thesis is that it's a pyramid scheme and illegal, he is not disputing the profits the company is making. It's far from certain that HLF is indeed a pyramid scheme: you should check out the link that I posted above, also contains comments from one of the authors of the paper about pyramid scheme's that was quoted by Ackman in his presentation.

 

And a lot of other points in his presentation are imo not that relevant from an investing prespective: who cares that people on the lower levels aren't making any significant amount of money? No shit sherlock! Of course that's the case. But plenty of people that want to be sold a dream...

 

I can't understand why he would call this his highest conviction pick ever... it's mostly a legal question, and the only way to find out what the answer is is going to court.

[zippy1]

I also think Ackman is wrong: HLF isn't a zero. the main point of his thesis is that it's a pyramid scheme and illegal, he is not disputing the profits the company is making. It's far from certain that HLF is indeed a pyramid scheme: you should check out the link that I posted above, also contains comments from one of the authors of the paper about pyramid scheme's that was quoted by Ackman in his presentation.

 

And a lot of other points in his presentation are imo not that relevant from an investing prespective: who cares that people on the lower levels aren't making any significant amount of money? No shit sherlock! Of course that's the case. But plenty of people that want to be sold a dream...

 

I can't understand why he would call this his highest conviction pick ever... it's mostly a legal question, and the only way to find out what the answer is is going to court.

Hielko, thank you for taking the time to share these very important points.  I am also not sure whether HLF is a zero either, although I have not position in this fight. 

One interesting thing is that these MLM appear to be quite popular in East Asia. Since we moved back, my wife have been approached by 4-5 different MLMs via her "friends." Often, my wife would like the products enough to want to buy some for our own uses. However, she would have no interests to go push these products herself.

 

However, due to the social pressure, she would often agree to become a "member" of a MLM just to help her "friends", even though she would not be paying the fees; instead, the "friends" who sold her the goods would be paying for her.  I assume so that they could keep their "quota" going in the MLMs.

 

I am sure in Bill Ackman's analysis, my wife is the kind of people at the lower levels that would never make any money of joining a MLM. Yet, I just could not see her stop buying products from these few MLMs that she joined (or lending her name to her "friends" in these MLMs to keep their things going.) Since we were often told that "oh, this so-and-so (people I also know) is also using this product, and that so-and-so (another people that I also know0 is also using that product,"  I figure quite a few people that we know are buying from these MLMs; yet, they have never tried to sell to us.

 

My take is that there are quite a few people doing just like what my wife does. In other words, I don't see why this thing would stop.

 

So like you said, unless the legal system shuts these MLMs down, I don't see a case of "zero" like Bill Ackman sees. 

 

Interestingly, all her "friends" that I happen to meet also, none of them are unhappy about being part of thse MLMs and I have known them for 6-7 years by now.  I would have thought that typical pyramid schemes would not lasted for years.

 

Anyway, this case is very entertaining as I have no dog in this fight.

[ItsAValueTrap]

John Hemption of Bronte Capital has comments about his long Herbalife position here:

http://brontecapital.blogspot.ca/2012/12/bill-ackman-enters-city-of-stalingrad.html

 

"Bill Ackman enters city of Stalingrad"

 

One of the comments is interesting.. "So they are crooks but you can trust them? They are not your crooks? "

 

2- nuskin, usana, and herbalife are all greenblatt magic formula stocks.

 

http://www.magicformulainvesting.com/Screening/StockScreening

[MYDemaray]

I also think Ackman is wrong: HLF isn't a zero.

 

Other stocks that never went to zero, despite exclamations to the contrary: Allied Capital & MBIA

[fareastwarriors]

I also think Ackman is wrong: HLF isn't a zero.

 

Other stocks that never went to zero, despite exclamations to the contrary: Allied Capital & MBIA

 

Isn't He already deep in the money with his short. Even if Herbalife is not a zero, a price lower than now still represent a win for ackman.

[zippy1]

I also think Ackman is wrong: HLF isn't a zero.

 

Other stocks that never went to zero, despite exclamations to the contrary: Allied Capital & MBIA

 

Isn't He already deep in the money with his short. Even if Herbalife is not a zero, a price lower than now still represent a win for ackman.

That is certainly true.  But I guess it would also depend on whether the company can engineer a short squeeze?

[ItsAValueTrap]

There are many regulations that would make it very difficult for the company to engineer a short squeeze.

 

The Jim Cramer and Michael Steinhart hedge fund types out there might do it though.  If you read Jim Cramer's Confessions book (and Trading with the Enemy)... Cramer used to be the victim and I'm pretty sure he became the victimizer. 

 

2- For Ackman to get squeezed, you have to wait for the price to be higher first.  He won't be forced to cover unless he has ridiculous losses (which he doesn't) or if somebody engineers a buy-in.  You buy a crapload of shares in a margin account.  Then you transfer those shares to a non-margin account... your broker won't be able to lend the shares out unless the short sellers/their brokers are doing naked short selling.  This will force the short sellers to cover since they don't have any borrowed shares.

 

2b- If you are smart, you can borrow more shares than you plan on shorting.  This will protect you to some degree from the forced buy-in.

 

3- Ackman is an idiot.  If you take such ridiculously huge short positions, eventually you will blow up even if you are right.  He is asking for a short squeeze.

[giofranchi]

I don't know if this has already been posted, but here are some comments on Herbalife and Mr. Ackman's presentation by Chris Pavese:

 

http://www.viewfromtheblueridge.com/2012/12/28/herbalife-quote-of-the-day/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+viewfromtheblueridge%2FJkgK+%28The+View+from+the+Blue+Ridge%29

 

giofranchi

[Cardboard]

"Ackman is an idiot."

 

That is a pretty strong condemnation! He is not always right, but certainly not an idiot. I actually think the opposite and that the man is also quite generous by sharing his ideas with all of us and always with detailed presentations.

 

What is telling you that he has not hedged his position to a degree? He did it with GGP by shorting O. Some will say that he screwed up big time before with calls on TGT and that is true. However, I don't know what disclosure were made around that fund. It certainly did not stop him from attracting funds to manage, deliver solid returns and to become a billionaire which I have yet to meet one on this board.

 

Cardboard

[giofranchi]

"Ackman is an idiot."

 

That is a pretty strong condemnation! He is not always right, but certainly not an idiot. I actually think the opposite and that the man is also quite generous by sharing his ideas with all of us and always with detailed presentations.

 

What is telling you that he has not hedged his position to a degree? He did it with GGP by shorting O. Some will say that he screwed up big time before with calls on TGT and that is true. However, I don't know what disclosure were made around that fund. It certainly did not stop him from attracting funds to manage, deliver solid returns and to become a billionaire which I have yet to meet one on this board.

 

Cardboard

 

Cardboard,

you are just great! And funny too!  ;)

Unfortunately, I cannot help you to meet a billionaire...  ;D

All the best for a prosperous 2013!

 

giofranchi

 

[MYDemaray]

Ackman is actually the only billionaire whose hand I've shook...he was a lot taller than I expected.  Overall, I'm a fan of his...I just think some of these guys get overly excited by their shorts as we are all prone to do, and extrapolate zeros when in reality some of these companies have nine lives...

[ItsAValueTrap]

The history of short selling is ugly... there are a lot of short sellers who were right but blew up anyways.  If his short position really is around 20 million shares... that's around a fifth of all Herbalife shares and 20M shares X $29.39 = $587.8M which is probably a sizable chunk of his assets under management.

 

Look at what happened to Copper River management.  Their longs got whacked bigtime in 2008/2009, which is not unusual for that time period.  But their shorts didn't go down much... eeeeek.  I'm sure some traders out there realized that they could squeeze Copper River and that they likely liquidate their positions due to getting margin called and having their clients pull assets out.  Anyways, Copper River was a long/short hedge fund that folded after that time period... this supposedly "safe" strategy should have done extremely well in 08/09.  Unfortunately they did not have the liquidity to survive and Richard Sauer's book talks about how Goldman Sachs screwed them.

 

If you continually take these massive short positions, you will eventually lose a lot of money and your hedge fund will die.  It's not so much that I disagree with his analysis (*though I did that with JCP and made shorting it).  I don't think that his risk management is sane.

 

What is telling you that he has not hedged his position to a degree?

Most hedges swap one set of risks for another set of risks.  Oftentimes hedges don't get rid of risk.

[Guest wellmont]

Ackman has already made a fortune. He was shorting in the $60s. So he picked a price that was high even if it was not a flawed pyramid scheme. He has a hedged book so it would be very unlikely that this position could take him down. very unlikely. He has now tainted the company with his report. Even if it survives it likely will never get a high multiple.

[ItsAValueTrap]

He has a hedged book so it would be very unlikely that this position could take him down.

 

Look at what happened to Copper River.  Hedging often swaps one set of risks with another set of risks.  You are still exposed to risk.  Copper River was hedged... their fund still shut down and lost money even when they should have done really well in 08/09.

LTCM is an extreme example of hedged strategies not working.

[compoundinglife]

There are many regulations that would make it very difficult for the company to engineer a short squeeze.

 

The Jim Cramer and Michael Steinhart hedge fund types out there might do it though.  If you read Jim Cramer's Confessions book (and Trading with the Enemy)... Cramer used to be the victim and I'm pretty sure he became the victimizer. 

 

2- For Ackman to get squeezed, you have to wait for the price to be higher first.  He won't be forced to cover unless he has ridiculous losses (which he doesn't) or if somebody engineers a buy-in.  You buy a crapload of shares in a margin account.  Then you transfer those shares to a non-margin account... your broker won't be able to lend the shares out unless the short sellers/their brokers are doing naked short selling.  This will force the short sellers to cover since they don't have any borrowed shares.

 

2b- If you are smart, you can borrow more shares than you plan on shorting.  This will protect you to some degree from the forced buy-in.

 

3- Ackman is an idiot.  If you take such ridiculously huge short positions, eventually you will blow up even if you are right.  He is asking for a short squeeze.

 

Sure, shorting is not an easy game & DE's book on the Allied Capital trade illustrated that. He was able to exit the position because of the financial crisis. Had that not happened it could of taken much longer before it worked out.

 

But I think calling Ackman an idiot is a bit over the top. We do not have all the information that Pershing Square has, sure they showed us 3 hours of research but they have been working this idea for around a year. It is a large bet but also probably less than %10 of AUM as far as I can tell and maybe he has it hedged somehow, but if he does we don't know what the hedge is. So we don't have all the information.

 

Then you talk about LTCM which was leveraged 25 times or greater as example of why hedging doesn't work?? When you are leveraged 25 times or greater I don't think any strategy will work for an extended period of time, hedged or not. I don't know anything about Copper River so I can't comment there.

 

No position in HLF, just felt the need to call BS on #3

[LC]

He has a hedged book so it would be very unlikely that this position could take him down.

 

Look at what happened to Copper River.  Hedging often swaps one set of risks with another set of risks.  You are still exposed to risk.  Copper River was hedged... their fund still shut down and lost money even when they should have done really well in 08/09.

LTCM is an extreme example of hedged strategies not working.

IIRC copper river's portfolio did extremely well...after GS took them over.  :-[

[ItsAValueTrap]

You can always over-leverage a good trade and turn it into a bad one.

 

---

My argument (that Ackman has too big of a short position) is difficult to prove wrong because it might take him 20-40 years to blow up on HLF or some other stock.  40 years from now... I should probably take back what I said if he hasn't blown up.

 

I have no position in Herbalife so I have no skin in the game.  I don't think that my opinion is important... I'm just going to watch from the sidelines.

[compoundinglife]

You can always over-leverage a good trade and turn it into a bad one.

 

---

My argument (that Ackman has too big of a short position) is difficult to prove wrong because it might take him 20-40 years to blow up on HLF or some other stock.  40 years from now... I should probably take back what I said if he hasn't blown up.

 

I have no position in Herbalife so I have no skin in the game.  I don't think that my opinion is important... I'm just going to watch from the sidelines.

 

The point I was trying to make is that all we really know about PS is their long positions in their fillings and other investments they choose to disclose to the public. I think with the limited data it is not possible to assert that he is an idiot or at risk of blowing up. It is quite possible you are correct but without all the data to come to that conclusion it would be a lucky guess IMO. Maybe you or others know much more about there book, I am assuming though that your data is based on public information. 

[fareastwarriors]

http://www.bloomberg.com/news/2012-12-31/herbalife-rises-after-ackman-short-selling-spurs-buying.html

 

 

Herbalife Rises After Ackman Short Selling Spurs Buying

 

 

 

[siddharth18]

http://blogs.wsj.com/marketbeat/2012/12/26/whitney-tilson-im-shorting-herbalife-too/

 

 

Whitney Tilson: I’m Shorting Herbalife, Too.

 

lol. I think this comment about Tilson sums it up very nicely:

 

"Enter Whitney Tilson, the self involved, self promotional and congratulatory talentless hack that follows every single major investor into their investments and then appears on television to make the idea sound like his own. Tilson’s awful track record, endless hours of conference hosting and blog writing versus actual research, and lack of creativity or original thought are actually great counter indicators that HLF may actually survive and prove Ackman wrong. At least Ackman does some work and comes up with an idea. Whitney is always the empty suit."

[Edward]

"Enter Whitney Tilson, the self involved, self promotional and congratulatory talentless hack that follows every single major investor into their investments and then appears on television to make the idea sound like his own. Tilson’s awful track record, endless hours of conference hosting and blog writing versus actual research, and lack of creativity or original thought are actually great counter indicators that HLF may actually survive and prove Ackman wrong. At least Ackman does some work and comes up with an idea. Whitney is always the empty suit."

Ha!

 

I remember following Tilson as he shorted Netflix at 180$ thinking - that's actually a pretty good short. Then it goes to 300$, and the guy folds the position. Then after the stock tanks to 60$, he goes long despite a complete shift in the company's business model and the company still being overpriced.

 

I found this to be ridiculous.

[compoundinglife]

"Enter Whitney Tilson, the self involved, self promotional and congratulatory talentless hack that follows every single major investor into their investments and then appears on television to make the idea sound like his own. Tilson’s awful track record, endless hours of conference hosting and blog writing versus actual research, and lack of creativity or original thought are actually great counter indicators that HLF may actually survive and prove Ackman wrong. At least Ackman does some work and comes up with an idea. Whitney is always the empty suit."

Ha!

 

I remember following Tilson as he shorted Netflix at 180$ thinking - that's actually a pretty good short. Then it goes to 300$, and the guy folds the position. Then after the stock tanks, he goes long despite a complete shift in the company's business model.

 

I found this to be ridiculous.

 

Don't forget that management also sold stock after they spent a couple hundred million buying back at an average price of $220. NFLX should really be a case study in how not manage capital. 

[compoundinglife]

http://www.bloomberg.com/news/2012-12-31/herbalife-rises-after-ackman-short-selling-spurs-buying.html

 

 

Herbalife Rises After Ackman Short Selling Spurs Buying

 

I love how analysts rate this thing a buy when there is a clear track record of management lying to investors and the public. I just want to see these crooks get what they deserve. Pyramid schemes aside, management should be held accountable for their actions even if the FTC decides this is a legit business and the continue as an on going concern.