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This morning, the NY Post reported that Herbalife (HLF) was the target of a federal law enforcement investigation.

It appears that Pershing Square’s commentary was not the catalyst for this investigation, but rather a series of complaints that had been levied against the company over the course of a number of years.

We saw some sort of investigation as a virtual certainty given the high profile nature of the debate over HLF’s business model.  We also suggested that the stock gets much more interesting on the weakness associated that headline, but not immediately.  Bottoming is a process, and so are federal investigations.


Further, Pershing Square’s founder is scheduled to present at the Harbor Investment Conference on February 13th – it appears probable that his short position in HLF will be a (the?) topic of discussion.

Perversely, a lower stock price will ultimately work to the company’s benefit if it moves to buy back stock in aggressive fashion, as the company will be able to deploy it’s finite resources to repurchase a larger number of shares, which is what matters to the extent future news flow can be a catalyst for a short squeeze.  We actually think it makes sense for the company to play possum here, and allow its stock to drift lower in the coming weeks.

For investors, we continue to think the best course of action right now is to do nothing.  We have seen this play before when we covered the tobacco sector, and the day to buy the stocks is not the day the trial starts.  Investors should recognize that this data point does get one substantial piece of negative news flow that we were anticipating out of the way, and therefore takes us one step closer to the day the stock becomes investable.

Finally, in order to offer some balance to our prior expert call on the subject of multi-level marketing, we are hosting Anne Coughlan – she is a professor at the Kellogg School of Management specializing in distribution channels.  The call is tentatively scheduled for the 14th.  Investors may recognize the name from the HLF investor day, held earlier in the year.

Bottom line, we view today’s news as wholly consistent with the way we see the saga playing out – we caution investors to remain engaged in the news flow, but on the sidelines for the time being.


Call with questions.


Robert  Campagnino

Managing Director




Matt Hedrick

Senior Analyst