Herbalife (HLF - Snapshot Report) dropped more
then 7 points or 10.3% yesterday, and just two weeks ago it was
the Bull of the Day. Since there are new developments, I thought
it would be a good idea to review why the stock holds a Zacks Rank of
#1 (Strong Buy) and is again the Bull of the Day today.
Herbalife Beats Estimates in 29 Straight Quarters
Herbalife has topped the Zacks Consensus
Estimate in each of the last 29 quarters. Bears will point to
guidance being much lower than it should be, but at the end of the
day, the analysts decided where they will put their estimates.
There is a similar precedent for this. Apple (AAPL - Analyst Report) used to
give guidance that was well below what would be expected for a
company that continuously beats and then raises guidance. Then, as
Tim Cook took over, the company removed that policy and gave a
more "realistic" guidance to Wall Street. The shock to the system
caused the stock to jump significantly higher.
This is an option for HLF as well.
Herbalife is a network marketing company that sells weight
management, nutritional supplements, energy, sports and
and personal care products worldwide. Herbalife offers its
products through sales representatives, sales
officers, and independent service providers. The company was
founded in 1980 and is based in Grand Cayman, the Cayman
Heavy Hitters Weigh In
In a late-December 2011 conference, Bill Ackman disclosed that
he was short approximately 20 million shares of Herbalife. The
total short interest as of the end of December was approximately
37 million shares. Ackman asserts that the company is nothing
short of a pyramid scheme and will end up at $0.00. To further
substantiate this claim, Ackman needs the FTC to investigate
the company and despite recent rumors and Freedom of Information
Acts, there has been no such investigation.
In early January, Dan Loeb's hedge fund Third Point filed a
13G which stated it acquired 8.9 million shares and the stock
officially became a battleground stock. It wasn't long after
that point that Carl Icahn became involved as well and the
billionaires went at it on live television.
More recently, the CEO of POST William Stiritz also threw his hat in the ring
and bought a 5% position in the company. He later added to his
position and switch his investment from a passive stake to a more
activist role. As an operator in the space and having done his own
due diligence including becoming a HLF distributor, the bets are
piling up against Bill Ackman.
In fact there have been no "big name" investors that have followed
Bill Ackman on the short side of this trade. In fact, there have been several other big investors that have also taken long postition in HLF. Those big names include George Soros, Richard Perry, Stanley Druckenmiller and Kyle Bass.
Enter Senator Ed Markey
The thing Bill Ackman needs the most is an FTC investigation into
HLF to determine if it is indeed a pyramid scheme. On Thursday,
January 23, he recieved a little push from the Massachusetts
Sentator Ed Markey.
The Senator's release noted: "One family in Norton, Massachusetts
reported that it lost $130,000, including the familys entire 401
(K), investing in Herbalife." I tried to understand how this
family from Norton lost their entire 401(k) in HLF when the stock
did not go to $0, but maybe they used some exotic derivatives and
were in over their heads. I hardly believe that the Senator is
more or less condoning that 401(K)'s and IRA's be liquidated in
order to invest in business ventures... but the ambiguity is
Sen Markey sent
letters to the Securities and Exchange Commission
(SEC), the Federal Trade Commission (FTC) and
to the company itself, asking for more
information about Herbalifes operations.
In particular, the letter to Herbalife bares a startling
resemblance to the questions posed to HLF by Bill Ackman. This
only makes one question, did Pershing Square write this letter for
the office of Senator Markey? The plot thickens a bit when I read
in The New
York Times that : "Mr. Ackman met with members of Mr. Markeys
staff last fall, but he has not met with the senator, a
spokeswoman for Mr. Markey said."
Was He Played?
Now that the damage is done, one can only start to put the pieces
of the puzzle together. It may surprise Senator Markey that he
might have been used in a larger game with billions at stake. I am
referring to the massive short bets that were made via HLF puts on
January 9 and January 10.
Seems an investor with uncanny skills and knowledge placed a $33M
bet on Herbalife puts. A put is a financial instrument that will
increase in value as the share price of the target company
decreases in value, thus, a tool used to make bearish bets. In
fact, 25,000 Jan-2015 HLF 50 puts were purchased for approximately
$7.25 on January 9. Then another 20,000 were bought the next day
for slightly less.
Those 45,000 puts that were trading for about $7 at the start of
the year were trading at appoximately $11 yesterday... but of
course that style of market manipulation is not something that is
hurting any residents of Massachecuts, right? Well not unless you
were the one on the other side of the bet.
I wouldn't suggest that its is illegal for members of Pershing
Square to lobby a senator to call for an investigation. That is
perfectly acceptable within the confines of the law... but the size
of this move, which effectively controls 4.5M shares, becomes
quite suspect given that Pershing Square's recent meetings with
the Senators staff and the reluctance of any other big investor to come out and publicly acknowledge a short position in HLF.
Anyone guessing if there is an impending letter to the SEC from
the Senator asking about the identity of the buyer? I am not
holding my breath on that one either.
In the Interest of Shorting Stocks
Twice a month, the NASDAQ website posts how many shares of a stock are sold short. Some people like to point to days to cover - the amount shares sold short divided by average volume to show how many days of normal trading it would take to bring the shares short to 0. I don't like that idea, as in an active day, the measure can move substantially, and only in the most extreme cases (Like when Volkswagon bought Porsche) will shares short actually go to 0.
So lets take a look at a chart of where short interest has moved from and where it stands now.
Now lets take a quick look at chart of the stock price...
Notice how one chart is going one way and the other chart is going the other way?
That is something that is called a short squeeze, and for those that think its over, let's take a look at the short float percentage. The float is a term for how many shares are available for trading, and that number will generally be less than the total shares outstanding. The float for HLF is 92.7M, and thus the short float percentage is 21.5%. That is huge, esp when you compare it to CMG (5.8%), NFLX (9.6%), HPQ (1.4%).
Herbalife Sees Estimates Moving Higher
Estimates for Herbalife have been rising of late. The Zacks
Consensus Estimate for 2013 for HLF stood at $4.66 as of
February 2013. By June of 2013, the consensus had risen
to $4.81. The consensus has since moved higher to $4.99 in
September and is now at $5.26, up a penny from the last time I
profiled the company as the Bull of the Day.
the same time period estimates for 2014 have moved from $5.40
$5.52 and are now at $5.95, up from $5.77 when I last profiled the
company just a few weeks ago.
The company recently (December 16) received a clean re-audit after an insider
trading scandal forced the previous auditor to resign. With this
clean audit, it is likely that the company will call on the debt
market to raise capital with the intention of buying back shares
and or increasing the dividend. Both or either move would result
in a short squeeze, as there are still 19.9M shares sold short.
Pershing Square recently covered a portion of its short position
and switched to puts, a strategy that limits risk but now includes
a deadline before the buts expire worthless. It is not clear who
has the other side of the put trade.
Previous Bull Of the Day
On October 2, 2013 Herbalife was written up as
the bull of the day.
This came just prior to Pershing Square covering 8 million shares
and switching into puts. Since the end of September, the number
of shares sold short has decreased from 24.4M to 19.9M. Market
participants have suggested that Ackman is either doubling down on
his short position if he is in fact the recent buyer of puts.
Those purchases were on the open market, whereas his pervious move
into puts was a private transaction.
Herbalife trades at some very attractive multiples. The
twelve months PE of 14x is well below the 21x industry
average. Similarly, the 12.4x forward PE multiple is also
trading at a discount to the 16.2x industry average. Price to
sales multiple of 1.6x has the company
trading at a premium to the industry average of 0.5x. One
metric I like to focus on is the net margin and HLF sports a
11.3% net vs a 3.8% industry average. Given the low
multiples and substantially higher net margin than the
industry, it is apparent that the valuation is still
depressed based on the resistance from short sellers as
investors are still cautious on the idea of the stock being a
A quick look at the price and consensus chart shows that
claims of a pyramid scheme and numerous bear attacks on its
multi-level marketing model, the company continues to get higher
higher earnings estimates. The gaps between the colored
show the continued growth in earnings, just what growth
want to see.
I am long HLF.
Brian Bolan is a Stock Strategist
He is the Editor in charge of the Zacks Home Run Investor
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