Event: HLF reports their Q2 earnings tonight after the close. The options market is implying about a 10% move on earnings, which is very rich to the 4 qtr avg move of about 3.75% and the 6.8% avg over the last six quarters.
Sentiment: It is interesting to note that out of the 10 equity research analysts that cover the stock, only one comes from a large bulge bracket firm, while the other 9 are boutiques or regional firms. Of the 10 firms, 6 rate the stock a Buy and 4 a Hold with an average 12 month price target of ~$56.
Short interest has remained fairly steady over the last quarter at ~36% of the float (Pershing Square, run by Bill Ackman likely a large part of this), while the top 10 shareholders own close to 70% of the shares outstanding (the largest being Carl Icahn with ~16.5%).
Options Open Interest: Total open interest mildly favors calls at 225k to 211k, with the largest open lines: Jan 20 puts 21k, Nov 45 puts 20k, Jan 60 call 17k, Nov 70 call 15k, Aug 70 call 14k, Feb 80 call 12k & Aug 55 & 65 calls 11k.
Last week on July 22nd when the stock was making new 52 week highs, the Aug 60 and 80 calls were a active with over 7k of each trading, it looked like the 60s were sold to close, while the 80s bought to open, could have been a roll.
Vol Snapshot: HLF volatility has gone up in the event along with the stock price. It’s seen even higher vol in the past but that was largely due to the wildness around the Ackman /Icahn battle. Currently, front month vol stands a little above 80 with the next month out just below 70.
IV is likely to fall into the 50’s following the event. An at-the-money straddle in September is likely to lose about 3 dollars after the move in premium.
Price Action / Technicals: The stock is up 81% ytd, with half those gains coming this month and almost all coming since the end of April.
If this was any old stock, the chart would suggest a near-term overbought condition, but given the recent break-out to new 52 week highs, and the high short interest, baring any adverse fundamental news the stock should see $50 as very healthy near term support (red shaded area below), while $45, the breakdown lever from late last year should serve as healthy long-term support.
Fundamentals / Valuation: The only reason this $6 billion market cap company is on anyone’s radar is due to the battle btwn 2 hedge fund titans in the stock. One who thinks the company is a sham and the other apparently just looking to pick a fight and sees the potential for an asymmetric return. I can’t speak to the validity of either’s argument, they have both wagered hundreds of millions of dollars that the other is wrong, but it sounds to me that the products suck and the sales practices of HLF are worse.
MY VIEW: The stock appears to be un-investable, despite what appears to be a fairly cheap valuation, trading at 13x earnings that are expected to grow next year 18%. There is a potentially binary event out there, if the justice dept does investigate HLF’s sales practices and forces them to change, the stock will be down 20% quickly, but the problem on the flip side is that they may never announce their intention to do anything at all, which is why the volatility in the stock price could continue for the foreseeable future.
We are looking at different trades, none of which include directional bets, as your guess is as good as ours, but given the high levels of IV could present opportunities in and around the earnings event. We will be sure to post on anything that looks compelling.