Shares of Herbalife Ltd. (HLF - Snapshot Report) , plunged on Thursday after renowned investor and hedge fund manager, Bill Ackman, declared that he has restructured his short position on the global network marketing company. Herbalife’s stock closed at $68.25 per share on Oct 3, 2013, down 6.6% from the previous day’s closing price. It is believed that the share price of Herballife fell as it was revealed that Ackman did not have as many shares sold short.
On Oct 2, 2013, Ackman communicated that his hedge fund, Pershing Square Capital Management, has cut down its short equity position on the former by nearly 40%. Alternatively, Ackman has purchased a long put option that will allow Pershing Square to sell the stock at a specific strike price by a specific date.
Mr. Ackman said that the replacement of its short position is a win-win option as it will allow him to reduce the risk of short squeeze while allowing it to make a profit even if the company’s shares decline. In a short squeeze strategy, investors aggressively purchase stocks thus raising the share price and compel the short seller to buy back the shares even at a loss.
In Dec 2012, Ackman accused Herbalife of using pyramid scheme i.e. deceptive marketing practices for improving its business. According to him, the company enrolled new sales persons instead of selling products to make profit.
Hence, in the same month Ackman has declared a $1 billion short position against Herbalife expecting to gain when the company’s share prices decline in the near future. In short positions the investors borrow stocks and then make money by selling the shares when its prices fall. Here, instead of purchasing the stock, short sellers borrow the shares by making a commitment to return the shares within a specified time period.
Following Ackman’s move in Dec 2012 Herballife’s’s share price started to rise and has increased 51.3% to date. As a result, Pershing funds started incurring losses.
Herbalife offers a range of science-based weight management products, nutritional supplements and personal care products intended to support weight loss and a healthy lifestyle.
Other Stocks to Consider
Herbalife holds a Zacks Rank #1 (Strong Buy). Some other retail stocks which are going to perform well, going ahead, include Rite Aid Corp. (RAD - Analyst Report) , GNC Holdings Inc. (GNC - Analyst Report) and Best Buy Co., Inc. (BBY - Analyst Report) . While Rite Aid carries a Zacks Rank #1 (Strong Buy), GNC Holdings and Best Buy hold a Zacks Rank #2 (Buy).