William Ackman Vows to Take Down Herbalife (HLF)

Nutritional and weight-loss supplements company Herbalife (HLF: Charts, News) suffered a major setback this week, after Pershing Square Capital CEO William Ackman called the company's multi-level marketing business model a "pyramid scheme" and stated that he was shorting the company for as long as possible.

Famed value investor and hedge fund manager William Tilson also joined Ackman in disclosing his short position on Herbalife and other multi-level marketing companies. Hedge fund managers David Einhorn and Jim Chanos, whose long and short positions are widely followed, are also rumored to hold large short positions against Herbalife. Daily Chart
On Thursday, Ackman, who launched a website attacking Herbalife, hosted a three-hour presentation to over 500 people, detailing evidence that the company was an "unsustainable pyramid scheme." Ackman, in a presentation consisting of over 300 slides, claimed that the company inflated the suggested retail price of its products and exaggerated its retail sales numbers in public filings. He also claimed that the company's multi-level marketing system - in which salespeople are tasked and rewarded for recruiting more distributors - took advantage of "poor and ill-informed" job seekers, forcing new recruits to take on even more distributors endlessly. Herbalife's salespeople not only make money on their own sales, but also on sales from new recruits whom they sponsor and bring into the company. Ackman called this business model a "modern day version of a Ponzi scheme." Ackman is the first major institutional investor to openly disclose a short position in Herbalife and to accuse the company of covering up problems in its business model. Shares of Herbalife, which had already been sliding for three months, plunged more than 25% after the announcements from Ackman, forcing Herbalife management to scramble to mount a defense against increased criticism. On Wednesday, Herbalife CEO Michael Johnson answered, claiming that Ackman's "bogus" accusations were manufactured to benefit his fund's "business model." Johnson also accused Ackman of stock manipulation, noting, "An extraordinary number of puts on our stock were due to expire this Friday. We previously learned this activity was pegged to some kind of significant event." Ackman said he was only shorting the stock directly with a heavy position accumulated over several months, and not engaged in any options trading whatsoever. Yet Johnson remained unconvinced, stating that Ackman made his presentation "on Thursday, the day before the puts expire." Johnson also complained that Herbalife executives were barred from Ackman's presentation and denied an opportunity to defend the company against the damaging accusations. "Had our executives been there, they would have been able to tear Mr. Ackman's premises and interpretation of our business model apart," Herbalife stated in an issued statement. Herbalife, which has a distribution network of 2.7 million salespeople worldwide in 81 countries, has hired law firm Boies, Schiller & Flexner LLP to defend against Ackman's attacks. Michael Johnson also intends to hold a special meeting on January 10 to counter the new allegations and address investor complaints. It also sped up its previously announced $1 billion stock buyback plan in an attempt to appease investors. B. Riley & Co. stock analyst Linda Weiser noted that the increased pressure on Herbalife had nothing to do with the company's fundamentals. She previously set a $101 price target on Herbalife before discontinuing coverage this week. "Herbalife's share price has been impacted significantly by market speculation related to high-profile short sellers," she stated. "We believe the business fundamentals and near-term financial performance of the company will not be the key drivers behind share-price performance for the foreseeable future." Herbalife is otherwise strong fundamentally, trading at 6.2 times forward earnings with a 5-year PEG ratio of 0.45. The stock also pays a quarterly dividend of 30 cents per share - a 4.26% yield at current prices. If Ackman and the other high-profile short sellers ease off, and Herbalife can mount a successful defense, then the company has a fighting chance to rally back towards its 52-week high of $73 per share. Other News About HLF Bill Ackman's Crusade to Crush Herbalife Bill Ackman takes Herbalife to the cleaners; stock plunges 25% Herbalife Ltd.: Is The Selloff Overdone? Is Herbalife's recent plunge a buying opportunity or a falling knife? Other Stocks in the News Toyota Plans to Sell 9.7 Million Vehicles in 2012 Toyota aims to stay ahead of U.S. automakers by the end of the year. Apple Inc. Hopes EU Fines Bury Samsung In Europe, Samsung's pain may be Apple's gain. Copyright 2012 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on Dec 28, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2016. Content published with author's permission.

Posted in ...