MorningWord 3/3/16: Must be Smoking the Herbalife

by Dan March 3, 2016 9:40 am • Commentary

In my almost two decades in the market I am often amazed at how much leeway investors will give corporate managements that are obviously crooks, and how persistent some managements will be in their deceptive practices. Case in point is Herbalife (HLF), a stock that has been a battleground between two hedge fund giants for years, Bill Ackman on the short side, and Carl Icahn on the long side.

Just this morning, HLF, who is being investigated for their sales practices and corporate communication by the Securities & Exchange commission (SEC), by the Federal Trade Commission (FTC), and by the Department of Justice and the freaking FBI made a massive restatement of new member tallies that were just given last week, blaming data collection errors that sent the stock up 23% since their Feb 25th earnings:


Here is the thing, the stock is down only $3.60, or about 6%. Who the hell is buying this stock here??  Probably those who were short! 33% of the float is sold short, and those who are not Bill Ackman have to use these type of opportunities to reduce risk. They also live in constant fear of the potential for Ackman’s woes in other holdings like Valeant (VRX) (he is the third largest shareholder in the beleaguered pharma company that is down 75% from its 52 week highs, and down 33% on the year) to affect him in HLF forcing him to cover if he were to experience investor redemptions at this fund. Here is the thing on that front, Mr. Ackman has been on the brink before with investments where he digs in, and as was the case with Target on the long-side last decade, he ring fences individual concentrated investments into separate fund structures so that the plight of one will not offset gains in another, or under the worst case scenario cause redemptions in others.  I have no idea if this actually works, I suspect his investors usually invest in most of his funds, but you get the point. While Ackam’s Pershing Square has had great performance over the certain periods he has often been most identified with his vocal failures like his investment in Target (TGT) which supposedly was a near zero as most of his long exposure was in call options that expired worthless, or in JC Penney (JCP) that he sold very near the 30 year lows in summer of 2013.

So I’ll just say this, I am amazed that in light of all of these government agencies investigating HLF that the company could make such a critical reporting error, and I am even more amazed that for now that investors aren’t panicking more. And, on top of all of the investigations, get ready for a slew of fresh investor lawsuits.

If this company ultimately goes down in flames, (I have no idea if they will, they appear to have some serious survival skills) then complacent investors will get exactly what they deserve. There are so many other stocks to invest in where managements are clearly honest, where their business models don’t rely on preying on lower income people selling a very unlikely dream based. While I have NO skin in the game, and have not traded it in years, to me I see nothing other than a scummy company peddling a crappy product for all the wrong reasons. At this point it wouldn’t surprise me to see this thing go down in flames, perp walks, congressional hearings, the whole shebang.  In the meantime, I just don’t get how investors are not running for cover in this name. I am not trying to talk the stock down, I merely think I’m being rational.

Lastly on Tuesday I highlighted some unusual call activity in HLF (here), but concluded with this on the stock chart:

All that said this is one of the ugliest long term charts I have ever seen with a potential massive head and shoulders tops:

From Bloomberg

From Bloomberg

And then got a little artistic on CNBC’s Fast Money that night marking up the chart highlighting the head and shoulder’s top inside of what could be an epic long term head and shoulders top:

Yeah I have some serious art skills.