Ackman At the Herbalife Gate, Again

Take-away: We’re buying the dip in HLF as we think that the news about Chinese officials investigating Nu Skin is a separate issue from HLF, despite both businesses sharing risk on pyramid scheme claims. 

 

What’s going on with NUS and HLF?

  • Chinese regulators yesterday said they’d investigate accusations from The People’s Daily, the Communist Party’s main propaganda organ, which called Nu Skin, a skin-care and nutritional products company, a pyramid scheme.
  • Nu Skin (NUS) is trading down -45% since 1/14 (looks like someone had some inside info ahead of the announcement).  NUS earns ~ 31% of its revenues from mainland China.
  • Herbalife (HLF) is getting hit on pass-through fears that it could be the next target of an investigation (either abroad and/or in the U.S.). HLF has ~ 11% net sales from China, according to Q3 2013 results.
  • As background, the debate around the business practices of HLF took flight late in 2012 when Bill Ackman of Pershing Square Capital presented a 334 page PowerPoint at the Ira Sohn conference (on 12/20/2012) calling HLF a pyramid scheme, and announcing that his fund would take a short position in HLF with a $0 price target.
  • Rival activists, including Carl Icahn and Dan Loeb (and others), were quick to take the other side of Ackman’s short bet. 
  • Since Ackman’s presentation the stock has soared as high as 212%. As of December 2013, Ackman has lost as much as $500M in the position.
  • If you’re unaware of the intense animosity and scorn that these rival activists have for Ackman, see Vanity Fair’s April 2013 article The Big Short War.

 

Today we added HLF as a buy in our Real-Time Alerts

  • Today, it was announced that Ackman plans to claim in a public presentation next month that HLF operates illegally in China.
  • Yesterday’s Nu Skin news along with Ackman’s announcement today have sent HLF down -12% in the past two days.
  • We view Ackman’s decision to claim HLF operates illegally in China as an effort to talk up his book.
  • We think this position is supported by a number of factors:
    • As we’ve stated before in our research, we do not know whether HLF is or is not a pyramid scheme. A Federal agency (SEC, FDA, FTC, or IRS) would have to make this determination (not a money manager) and we’ve yet to see any interest in an agency to open Pandora’s Box on the questionable business practices and accounting of multi-level-marketing companies.
    • In his original presentation Ackman was unable to convince investors that HLF is a pyramid scheme (based on the stock’s move). He’s now trying to augment his claim, but now the target is China, a country steeped in opacity’s vine when it comes to transparency.  Remember, Ackman wasn’t able to equivocally show how the pyramid scheme worked in the U.S., with the aid of geographic proximity and the ability to communicate in his mother tongue.
    • We cannot underscore more how vehemently the rival activists want to bury Ackman on this position – even if they believe HLF is a pyramid scheme. We expect this rival camp to continue to drive the debate, and the stock.
    • The company has also done all it can to insulate itself and protect the stock price, from hiring the high profile David Boies of the law firm Boies, Schiller & Flexner LLP to issuing aggressive stock buybacks and dividend raises. 
    • Finally, HLF has a lot less skin in the game in China compared to NUS, as we note above.  While there’s the risk that a decision in one country can tumble weed into other regions, our investment approach with HLF is simply to take advantage of the stock that is oversold on fear.

Ackman At the Herbalife Gate, Again - zz. hlf

 

Matthew Hedrick
Associate


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more