HLF - Herbalife

[Hielko]

Interesting post on why Ackman is wrong: http://kiddynamitesworld.com/why-bill-ackman-is-wrong-about-herbalife/

 

Think I mostly agree with this argument. Totally agree HLF is shady: but doubt that it is a real pyramid scheme and worth absolutely nothing.

[fareastwarriors]

Nu Skin article in Fortune magazine

 

http://management.fortune.cnn.com/2012/10/26/nu-skin-short-sellers/

 

It's  pretty juicy

[siddharth18]

Nu Skin article in Fortune magazine

 

http://management.fortune.cnn.com/2012/10/26/nu-skin-short-sellers/

 

It's  pretty juicy

 

Just finished reading it. Thanks for posting. Seems like companies with MLM model face the heat regularly and most of the rev comes from out of USA.

[siddharth18]

I think that it is unreasonable to assume that if Herbalife loses legal status in the US it will receive no serious scrutiny elsewhere. It is true that most of the business will probably continue operating as normal around the world regardless for a while.

 

A logical conclusion but probably not the case. These companies tend to spend minimal amounts on advertising. Herbalife stated in 2004 that they do not report their advertising expenses separately in the financials due to the amounts being "de minimis". I believe them :)

 

A lot of products are being bought by the distributors themselves because it is required to do so in order to advance in the Herbalife distributor levels. If you do a random survey around my country about Herbalife, the brand mostly stands for a pyramid scheme, not for any products. No one actually knows what Herbalife does exactly except current and past distributors.

 

Maybe this is different in the US, but I somehow doubt it considering Ackman's findings match my own impression.

 

Ackman is short around 20M shares, which is a 540M$ position at 27$ per share. The company can probably buy 10%, maybe even 20% of outstanding shares but that is not enough. It also doesn't do anything for disproving Ackman's argument.

 

In fact, their response supports Ackman's thesis. The proper response was to ignore him and move on, or at least to make a decent counter-argument. They took the worst path.

 

Government entities usually are very poor at doing their supposed job. Recall that the SEC had ample evidence against Bernard Madoff as early as 2000. They did NOTHING.

 

What Ackman pointed out has been out there for years. Yes, the nutritional clubs aren't cutting edge, and not everyone can become a millionaire by purchasing a $100 kit; and SEC has been following it closely since 2004 (http://factsaboutherbalife.com/category/sec-correspondence/). If you see Nu Skin with similar business model, they were just slapped on the wrist (fined a few million) by FTC in the past.

 

Ackman said he's more than a billion short in the Bloomberg interview (at 1:20-1:30)

 

Ackman alone is the ENTIRE short position against the longs which are institutional investors + HLF buybacks; and analysts remain unfazed.

 

Regardless of what HLF says on the analyst day (January 7th, 2013), HLF would only get in trouble if either:

 

1. SEC/FTC bring a MASSIVE action against it and systematically dismantles it. What new will SEC/FTC uncover, from Ackman's research, which it didn't already know since the past 30 years? It even concluded its own probe after the Einhorn questions (http://www.bloomberg.com/news/2012-08-10/herbalife-resolves-sec-correspondence-after-einhorn-questions.html).

 

2. HLF starts losing business due to saturation. But then in Q3 of 2004, net sales in USA was $68.1M and in Q3 2012 it was $202.9M - in a country where it's been for 30 years.

 

I, for one, was hoping for a more aggressive response last week to Ackman's presentation. Hopefully they will pull out all the stops on Jan 7th. Raise dividend, announce special dividend, increase buyback, insider purchases, talks about LBO - whatever it takes.

 

 

Enterprise Value/EBITDA is 4.41 wow; Div Yield is 4.4%

 

Disclosure: No position so yet.

[siddharth18]

Does anyone remember Mike Burry's Avanti/Avant! trade (from the The Big Short)? I couldn't help but remember that:

 

As often as not, he turned up what he called “ick” investments. In October 2001 he explained the concept in his letter to investors: “Ick investing means taking a special analytical interest in stocks that inspire a first reaction of ‘ick.’” A court had accepted a plea from a software company called the Avanti Corporation. Avanti had been accused of stealing from a competitor the software code that was the whole foundation of Avanti’s business. The company had $100 million in cash in the bank, was still generating $100 million a year in free cash flow—and had a market value of only $250 million! Michael Burry started digging; by the time he was done, he knew more about the Avanti Corporation than any man on earth. He was able to see that even if the executives went to jail (as five of them did) and the fines were paid (as they were), Avanti would be worth a lot more than the market then assumed. To make money on Avanti’s stock, however, he’d probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.

 

“That was a classic Mike Burry trade,” says one of his investors. “It goes up by 10 times, but first it goes down by half.” This isn’t the sort of ride most investors enjoy, but it was, Burry thought, the essence of value investing. His job was to disagree loudly with popular sentiment. He couldn’t do this if he was at the mercy of very short-term market moves, and so he didn’t give his investors the ability to remove their money on short notice, as most hedge funds did. If you gave Scion your money to invest, you were stuck for at least a year.

 

[Guest rimm_never_sleeps]

here is the problem with formula investing. greenblatt's us value select fund owned a combined 3%+ position in herbalife and nuskin. because they tick all the boxes of the magic formula.

[ItsAValueTrap]

Almost every stock on the magic formula lists are ugly/icky.

 

For a brief period in time, there were a bunch of chinese reverse mergers.  Those were the most obvious shorts.  I don't think that the MLM stocks are good shorts... I might be inclined to go long them rather than short them if somebody put a gun to my head and made me choose.  Some of them generate lots of cash flow and are buying back shares.

 

Does anyone remember Mike Burry's Avanti/Avant! trade (from the The Big Short)? I couldn't help but remember that:

Maybe that's a fallacy?  It's a story that sounds good but it's hard to say if investing with the "ick factor" is sound.

 

Let's suppose that icky stocks in aggregate lose money for investors.  And suppose that Burry is able to find value among this terrible asset class (sort of like professional gambling... as an asset class, gambling has negative EV).  It would not follow that ickiness leads to good returns.

 

Of course... maybe the magic formula doesn't lead to good returns.

[siddharth18]

Almost every stock on the magic formula lists are ugly/icky.

 

For a brief period in time, there were a bunch of chinese reverse mergers.  Those were the most obvious shorts.  I don't think that the MLM stocks are good shorts... I might be inclined to go long them rather than short them if somebody put a gun to my head and made me choose.  Some of them generate lots of cash flow and are buying back shares.

 

Does anyone remember Mike Burry's Avanti/Avant! trade (from the The Big Short)? I couldn't help but remember that:

Maybe that's a fallacy?  It's a story that sounds good but it's hard to say if investing with the "ick factor" is sound.

 

Let's suppose that icky stocks in aggregate lose money for investors.  And suppose that Burry is able to find value among this terrible asset class (sort of like professional gambling... as an asset class, gambling has negative EV).  It would not follow that ickiness leads to good returns.

 

Of course... maybe the magic formula doesn't lead to good returns.

 

Well the only reason why I look up to Burry is because he has the stomach to loudly disagree with the market sentiment and withstand the losses while the market takes the stock to the rock bottom before realizing its value.

 

This doesn't make HLF itself a good buy or sell but it's common in that "investors have puked up HLF shares in horrified response to negative publicity."

 

His ability to remain objective to an uncommon degree, regardless of external opinion was one of his most important traits as a value investor.

[siddharth18]

How often do you see a hedge fund use Adwords to spread its gospel?

 

http://i.imgur.com/s5Tsk.png

[Edward]

Ackman said he's more than a billion short in the Bloomberg interview (at 1:20-1:30)

Ackman is referring to the original value of the position he built over the last few months, which is 20M shares at around 50$. The stock is 27$ today.

Total short interest is only a bit above 20M shares anyway: http://www.nasdaq.com/symbol/hlf/short-interest

 

As I said, media statements can be misleading and have to be verified.

 

[Guest rimm_never_sleeps]

How often do you see a hedge fund use Adwords to spread its gospel?

 

http://i.imgur.com/s5Tsk.png

 

this was exactly my point. the first thing anybody who investigates herbalife is going to see is a disccussion of whether or not it's a pyramid scheme. and that's a very good thing.

[siddharth18]

this was exactly my point. the first thing anybody who investigates herbalife is going to see is a disccussion of whether or not it's a pyramid scheme. and that's a very good thing.

 

Not sure...Isn't there some rule against trademark bidding? Meaning HLF can file a copyright infringement complaint with Google (http://support.google.com/adwordspolicy/bin/answer.py?hl=en&answer=6118) because Ackman is bidding on a the trademarked keyword "Herbalife." It'd probably take a while for them to notice and file a copyright request with Google in that case.

[Hielko]

I think it's a safe bet that they have noticed this already, but doubt that they can do anything about it.

[fareastwarriors]

http://www.forbes.com/sites/helaineolen/2012/12/24/bill-ackman-takes-on-herbalife/

 

Forbes

 

Bill Ackman Takes on Herbalife

[fareastwarriors]

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

 

 

Whitney Tilson: I’m Shorting Herbalife, Too.

[Edward]

Herbalife CEO response:  http://ir.herbalife.com/

The CEO put up some weak straw man arguments. He says "lets see what these short sellers are saying" then goes on to "debunk" the accusations.

 

1. "The products don't work".

 

I went over the entire Ackman presentation and I can't recall that he ever said that. Sure they work, they're just generic and waaay overpriced.

 

2. "No one makes any money selling the product and no chance for advancement".

 

Err..... no one said that. It's just that this income is much lower than recruitment(or pyramid) income and advancement chances are extremely low but not zero.

 

3. "Herbalife independent distributors are not ethical"

 

Huh? Never seen this claim by Ackman or anyone else.

 

This guy didn't directly address any of Ackman's arguments and in my book this + actually bothering to reply to a short seller is really suspicious. A real red flag, this.

 

[Guest rimm_never_sleeps]

Herbalife CEO response:  http://ir.herbalife.com/

The CEO put up some weak straw man arguments. He says "lets see what these short sellers are saying" then goes on to "debunk" the accusations.

 

1. "The products don't work".

 

I went over the entire Ackman presentation and I can't recall that he ever said that. Sure they work, they're just generic and waaay overpriced.

 

2. "No one makes any money selling the product and no chance for advancement".

 

Err..... no one said that. It's just that this income is much lower than recruitment(or pyramid) income and advancement chances are extremely low but not zero.

 

3. "Herbalife independent distributors are not ethical"

 

Huh? Never seen this claim by Ackman or anyone else.

 

This guy didn't directly address any of Ackman's arguments and in my book this + actually bothering to reply to a short seller is really suspicious. A real red flag, this.

 

in this case he has to respond. he was forced to. and it's actually only the response before the real repsonse, which is coming in early January. the reason this is so weak is because his business is indefensible. It is a pyramid. The FTC doesn't actually do any work so they won't declare it that. ackman is doing the work for them and might make it obvious even to them.

[frith2012]

Keep in mind Ackman has gone long a multi level marketing scheme in the past (Pre-paid legal).  Although I agree with his thesis, the idea that the stock collapses seems a bit far fetched.

[Edward]

Although I agree with his thesis, the idea that the stock collapses seems a bit far fetched.

I agree. It is not "a sure thing" as Ackman declared, and although I believe his thesis is right I have no position myself.

[Green King]

Have you guys see the presentation on the website? It is a great piece fundamental analysis. 

The business dose not bring any value to society for that is makes me sick to the bones.  >:(

Talking about this make me feel uncomfortable.

 

On analysis

What is most important is that this leech is running out of places to grow.

Therefore it will drop... Since the cash flows are not based on any fundamental footing and there is nothing in the balance sheet that justify the price.

 

[given2invest]

FYI that CEO response came the day BEFORE the Ackman presentation and is intended for their distributors probably, not Wall Street.

[FiveSigma]

Either way that joint reeks up to high heaven.

 

Ackman's analysis a masterpiece. On par with their analysis of bond insurers from 2007.

[soycapital]

Either way that joint reeks up to high heaven.

 

Ackman's analysis a masterpiece. On par with their analysis of bond insurers from 2007.

 

I would not touch this stock with a 20' pole.

[zippy1]

Anyone see this report?  So Bronte capital is holding an opposite view vs. Bill Ackman. I have no position and have to say that this is interesting.

http://www.bizjournals.com/triad/blog/2012/12/some-hedge-fund-managers-like-the.html?ana=yfcpc

While Herbalife Ltd.'s stock has taken a beating due on the recommendation of a well-known hedge fund manager, some others think the company is a solid bet and have been buying Herbalife stock.

 

The Wall Street Journal's MarketBeat blog reports that Sahm Adrangi at Kerrisdale Capital Management LLC is going long on Herbalife, which is notable because the investment management firm has often taken short positions on companies it feels are overvalued.

 

John Hempton, chief investment officer at Australian hedge fund Bronte Capital, is also taking the same view, the blog reports.

[cofabmd]

"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