Opinion: Herbalife vs. Ackman, four years later

"Now four years in the making, the protracted battle Pershing Square - Herbalife (HLF) is detailed nicely in the most recent New Yorker magazine article "Financiers fight over the American dream"by Sheelah Kolhatkar.

I don't wish to talk about HLF, rather I look at Ackman' moves that scream 'wrong' in general:

  • Going Big (10% AUM is huge) instead of tip-toeing.

  • Sheep-herding -As you learn that Ackman went after Herbalife following David Einhorn, you wonder if he didn't know Einhorn is an able poker player. If this was that good, why didn't Einhorn take a big bite to begin with.

  • Herbalife was a long lived MLM, has been around for decades. Whether for the right or the wrong reasons, a business that has survived for a long time / many lawsuits /economic cycles is not "garbage" or can be easily dismissed. If HLF was an easy target it would have fallen by then.

  • If PSC has a L/S strategy that is in fact mainly L(Long) why commit so many resources to a short ? To add injury to the offense "Ackman pledged to donate his personal profits from the short to charity." Not in the [realDT] world, not in any world !

  • Ackman: "I am more interested in fighting evil." If you need a government investigation, do you really think the government is going to favor a hedgie [profiting from the fall of it] ?

  • Then came the CNBC Ackman-Icahn face-off that was of comic proportions, most of you watched it. I think Icahn was trying to irk Ackman. A stock drawn into a public battle almost never goes down (unless it's an epic fraud something like Enron).

Another moral of this story is not to fall for a a business that easily morphs forms. MLM "adjust their business models to remain in the zone of legality." Ackman was vindicated as far as the government investigation that ensued and the settlement the company had to reach. Morally he won...yet lost the pocketbook score."

 

I preferred the awkward hug that followed it at Delivering Alpha. I think Ackman is a very good investor, even with the large recent mistakes his fund has still outperformed the S&P significantly. The mistake in shorting Herbalife was more related to the size of the position relative to float and then not closing it out after achieving a 50%+ IRR in

 

I'll play devil's advocate and say I'm bullish on Ackman. He's bounced back from similar events before (most notably MBIA, which went on for 6-7 years before he made a profit). That's no guarantee of future success, of course, but if he gave up Herbalife now, it'd be silly after all the resources he spent on it and the effects it had on his fund and even his personal life. Maybe he'll wait until he breaks even on his Herbalife investment and call it quits then?

 

Meh... I'm very torn here. I very much support what Ackman is doing with Herbalife from a moral point of view, although his move had really jeopardized significant amount of capital he was entrusted with. I personally hate every fucking MLM company out there, including all the idiots it breeds. It fucking thrives on the stupidity of people, often those who are promised false hope and have no intellectual capability to make a proper judgment. I'm sure everyone has had one of those idiot friends who strayed from a real career and started soliciting you about their wonderful new business venture. Some people are just so fucking gullible beyond belief.

 

Lots of fair points here. However, I think it's unfair to characterize PSC as following a "long short" strategy. L/S is much more about having a large book of relative value trades and careful hedges. Ackman is far more value oriented - buying at what he/his team considers to be at large margins of safety where they can add (or destroy in the cases of shorts) value.

Just thought I'd add this here because I think there's a lot of misconception about public equity investing and the various strategies.

 

Anyone who rationalizes an investment of other people's money based on a moral conviction has a irreparably deficient understanding of what it means to be a fiduciary.

Life's is a tale told by an idiot, full of sound and fury, signifying nothing.
 

This is what happens when you get dragged through the mud and shit on from every angle but come out on top and make a fucking fortune like he did with MBIA. You now think you are god.

Also, Herbalife may or may not be a pyramid scheme, but fuck all MLM firms in general. I never want to see another beachbody or ignite energy or essential oils post on my fucking facebook wall.

Commercial Real Estate Developer
 

Someone please correct me if I'm wrong, but isn't FTC calling Herbalife to restructure "unfair" compensation to not comp people on recruiting (1) calling Herbalife a de-facto pyramid scheme and (2) dealing a fatal blow to Herbalife "business model"?

Disclaimer: I am from a SEA country where there was a proliferation of these MLM / pyramid schemes and I just loathe them, seeing how lives were destroyed wherever they go, especially in the rural areas. I have developed this urge to slap the fuck out of sleazy MLM scheme salesmen, or as printed in their business card, "Director of VIP group / Gold members / 1billion-in-comp-a-month club"

Nothing is true; everything is permitted.
 
Ezio Auditore:

Someone please correct me if I'm wrong, but isn't FTC calling Herbalife to restructure "unfair" compensation to not comp people on based on recruiting (1) calling Herbalife a de-facto pyramid scheme and (2) dealing a fatal blow to Herbalife "business model"?

Disclaimer: I am from a SEA country where there was a proliferation of these MLM / pyramid schemes and I just loathe them, seeing how lives were destroyed wherever they go, especially in the rural areas. I have developed this urge to slap the fuck out of sleazy MLM scheme salesmen, or as printed in their business card, "Director of VIP group / Gold members / 1billion-in-comp-a-month club"

http://brontecapital.blogspot.com.au/2016/07/the-herbalife-rorschach-te…

 

I'm not an Ackman lover or detractor but this is a joke. Do your research and read the FTC complaint before you start gravedancing on the shorts. The FTC goes just short of calling it a pyramid scheme (which either HLF negotiated out of the settlement or the FTC refrained from doing for political reasons), and the fine is irrelevant compared to the material "business restructuring" they're ordered to do. FTC was in a hard place - if they came out and shut it down as a pyramid scheme, the naysayers would be able to say "you shut down a legitimate business that provided income for all these economically disadvantage minorities etc." Instead FTC said, "fine, we're only forcing you to shut down the part of your business that's pyramidal and let's see if what's left is legitimate." Let HLF dig its own grave. Line it up side by side with the FTC Vemma complaint - the only differences are the lack of the words "pyramid scheme" and the lack of an immediate injunction to halt business, meaning HLF will slow bleed as recruiting and recruiting-related purchases unwind. Icahn misleadingly shot out his "it's not a pyramid scheme" press release and the media irresponsibly parroted him. Aren't you wondering why the share price is up less than 10% now post-announcement?

 

Lizard Brain that is all good and well. The restructuring may kill the company but how long will it be before the stock price reflects that because that is all that matters. He has been in this trade for roughly four years now, how long can he hold on till his prediction comes to fruition? That is what I wonder.

Array
 

How long he can hold out is a fair question but it's one really only him, his traders, his investors and possibly his repo counterparties can answer, unless you're intimately familiar with the structure of his short position in which case please share. I'm not saying it's a good or bad investment - we won't know until it's all said and done if four + years in addition to the massive headache was worth whatever return (+/-) he gets. Let me ask you though - why do you care if he can hold out or not?

 

I'm with Ackman here, have yet to hear an argument that comes even close to the level of detail that his does. Watching that brawl play out on CNBC made me think that Icahn is taking a gamble on something he knows barely anything about simply in hope of Ackman looking bad in the end.

 

Holy shit. I don't know how to even start my post so I'll start it with that. This company is INSANE. I live in the rural part of the midwest (read: zero Finance), and the people here just eat this shit up. Literally love it. On my FB feed at any given moment there are 10 posts about how Body by Vi's 90 day Challenge has changed their lives and how their nutritional shakes have allowed them to reach goals they've never seen possible blah blah blah. I've had a few of them approach me about being a part of it. It makes me so mad I want to scream because people can be so dumb to use these products and think they will get rich off the whole thing.

To make this all massively worse there are two distinct people from my hometown who really didn't do shit for jobs (personal trainer out of high school and one literally didn't even have a job) and they are both good looking and got involved and now they have been fast tracked to the top of this company because they are in their ads and all over promoting it. They are the perfect success story and one now has the promised BMW subsidy payment and all that BS. Any of my friends who have a lick of intelligence know this whole thing is a scam but sadly there are a lot of people who know nothing about how it works but buy into the get rich thing and join up. I now see the guy is in the finalists to win the Body by ViSalus modeling contest.

I, more than anyone else, hope this company falls apart so I can stop seeing this stupid shit in my hometown.

Blue horseshoe loves Anacott Steel
 
JasonLoh:
See Nu Skin Enterprise(Ticker:NUS). Similar business model

Holy crap. I'll run some numbers and see if I should buy som OTM puts on this one too. Looking at the Jan'14 30 or 25 Put to be accurate. Praying to Mammon that Einhorn or Ackman will shine their spotlight on it in the next year.

CNBC sucks "This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up
 

Welcome to the club. Always thought it was a pyramid scheme and it looks like I will be making a pretty buck on my Jan'13 50 put I bought last January.

Pretty good runthrough by Bill Ackman.

CNBC sucks "This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up
 

I watched this all unfold on CNBC. It was pretty entertaining, as it always is when people get upset and ditch the calm pretense on the news.

I do think this was market manipulation to a certain extent because Ackman knows his public opinion can move markets. The better question is did Herbalife deserve it?

 

I have multiple friends involved with Herbalife. One is an ex-con and he suckered his friends and family into it somehow. Now my Facebook and Twitter feeds are bombarded daily with this crap.

Had friends in another pyramid scheme before, PrePaid Legal Services, many years ago. They gathered all my old friends from high school for a pitch session at a buddies' house. I didn't go but my twin brother did, just to call BS.

He gets back, I ask how he went. The guy pulls up in a new BMW(of course), and gives his presentation. Predictably, all my friends signed up, paid the fee, and were pumped. "We're gonna be RICH, bro!" My brother was the lone skeptic. He said gave his reasons. Then the presenter gave what was supposed to be his deal closer, I guess.

"What if I told you that if you pay me $85 now(or whatever the fee was), I'd give you a fully loaded Mercedes-Benz right now?"

Of course my brother pointed out the holes in this logic. And none of my friends made a dime for their "investment."

Also funny to me is that you don't need the overpriced Herbalife products to lose weight. So they're preying on those that wish to lose weight or be healthier. That's par for the course in the health industry, however, so not surprising.

 

I read the presentation the other night, and all I can say is wow. Ackman tears HLF a new one in a way I have never seen before. It was a straight up character assassination of both the company and its management.

Then to have the CEO basically lose his shit on CNBC and say the world is a better place without Ackman, is insane and pretty validating for Ackman. Even GMCR didn't react this poorly when Einhorn shorted them last year.

All in all, Ackman has giant balls. No other way to put it. He is putting his entire career on the line for a trade that won't even make him any money, as he is donating the profit to charity. I just wish I had the prescience to see this one before he did - a lot of money to be made.

 
glide9811:
He is putting his entire career on the line for a trade that won't even make him any money, as he is donating the profit to charity.

MBP

"That dude is so haole, he don't even have any breath left."
 

Pretty damning, he is basically making 3 points:

1) The company is manipulating revenue and reporting a grossed up figure that isn't representative of actual sales, which is the reason it is keeping its product sales to recruiting fees above the 73% minimum to not be classified a pyramid scheme 2) Almost all product sales are made to people on the 'inside', i.e. those signed up to be part of the MLM 3) Participants in the MLM have to buy the products for themselves in order to get a paycheck, in essence having to 'pay to get paid'

The successful MLMs generally say private for a reason (Quixtar, Amway), and they have to be shaking in their boots at the thought of regulators taking a closer look at their accounting policies.

 

One of my relatives have been star distributors at HLF for several years now. She was doing perfectly fine before; but she actually loves the products and is a very passionate advocate. I take their protein powder shakes occasionally after workouts (I have their products because my mom - who is a successful career woman - joined the downline of that relative) and they taste better than most generic ones and don't give me unwanted weight gain which sometimes happens with cheaper protein shakes.

Sure, their products are overpriced - so are many designer clothing brands - but I do not think their MLM business model is a fraud (it may be flawed, but that's another story). There are risks going in - but as with any entrepreneurial activity, caveat emptor. My relative was living middle class income teaching private kindergarten (and her husband ran small biz), saw an opportunity, and worked hard at it. About 2-3 years in, I think she makes about $150,000/yr and on her way to the top of the chain. Pretty good for an ex-kindergarten teacher. She also never shuts up about how her whole family has lost weight and become substantially healthier after using HLF products. She was a thin woman to begin with, so I can't attest to the validity of that.

My point is that the MLM model works for normal people with discretion. As Ackman points out in his thesis, it is the desperate, poor, and ignorant people who lose out and, I guess, get "scammed." But what do you expect from these types of people in the first place? Just because you failed and lost money, doesn't mean the company is at fault. Everything's upfront - there's no hidden fee and no one is pointing a gun to your head to sign the contract. In fact, HLF forbids college students from becoming a distributor because college kids strapped for cash make stupid decisions. I don't doubt that Ackman really does believe in his thesis, but HLF didn't deserve it. He knows the power of his public opinions and is exploiting it to make his case. If Ackman picked some other random company and made an elaborate short thesis on it, its stock would have nosedived too.

*I shorted HLF right after the news btw.. wish I had taken a larger position.

Ugh the FBI still quotes the Dow... -Matt Levine
 

Ackman’s 343 page indictment of this fraud is the most satisfying takedown of MLM scams that I’ve ever seen. I’m not dissing the product at all, maybe it works maybe it doesn’t, I’ve personally never tried it and don’t know anybody who has. But it’s clear that the business is run on selling false dreams and is thus a pyramid scheme. There is a common thread that runs through these things, they always have the same bells and whistles in their recruiting literature. And yes, unless you’re at the top 1%, or in Ackman’s presentation 0.4%, of the pyramid you’re simply not going to make money to justify the cost. In most cases you will lose money!

I remember I was contacted to join ACN (which does the same MLM bullshit but with video conferencing phones) when I was in college. I decided to sit down with one of the recruiters so that he could do his pitch. I called bullshit after about 5 minutes and left.

It is fascinating how 2 prominent hedge fund titans can pound a single stock into oblivion.

 

A few other points to think about:

The stock went from $6 in '09 to $70 before Einhorn took it to $50 and now Ackman knocks it down below $30. When would "the music stop" for this stock if they hadn't made public calls (Einhorn less directly)?

It just goes to show you how difficult shorts can be, even apparent frauds like this one. If you read "Fooling Some of the People" by Einhorn, it took years of public and private battles before Allied's stock started to crack. I'm reading in a Canaccord note that Barry Minkow publicly shorted this on the same merits 5 years ago.

Ackman wants the FTC to deem this a pyramid scheme, but at worst, I'd think HLF would be forced to change some of its rules (which would slow growth). Again, Einhorn vs. Allied, Eisman vs. For Profits has pretty well proven that the government is very slow to take action and doesn't have much incentive to go against well capitalized companies. Also, given the rumors that Eisman fed the government info but was privy to their planned actions before they came public, I would surmise the FTC will be gun shy in following a HF into battle.

So, unless you think the FTC will take action, I don't think there's a ton of downside from here.

I don't think Ackman was questioning the profitability of HLF. He felt they were mis-stating financials to make it look like more was coming from retail rather than "internal" sales. If distributors want to buy a ton of supplements to make their targets to get paid out, that probably doesn't stop unless the FTC decrees that this is a pyramid scheme and shuts them down.

Sure, they can't keep moving into new geographies indefinitely and CF won't continue to grow so rapidly.

Looks like they've done $400m of FCF annually in recent years, and the stock trades at 11% FCF yield... maybe that gets to 15% which would be a $23.50 stock.

It's going to quickly become a crowded short, and I think you need government action to push this thing much lower (which again, I think is unlikely). I'm not a buyer here, but would not get short either.

 
grosse:
A few other points to think about:

The stock went from $6 in '09 to $70 before Einhorn took it to $50 and now Ackman knocks it down below $30. When would "the music stop" for this stock if they hadn't made public calls (Einhorn less directly)?

It just goes to show you how difficult shorts can be, even apparent frauds like this one. If you read "Fooling Some of the People" by Einhorn, it took years of public and private battles before Allied's stock started to crack. I'm reading in a Canaccord note that Barry Minkow publicly shorted this on the same merits 5 years ago.

Ackman wants the FTC to deem this a pyramid scheme, but at worst, I'd think HLF would be forced to change some of its rules (which would slow growth). Again, Einhorn vs. Allied, Eisman vs. For Profits has pretty well proven that the government is very slow to take action and doesn't have much incentive to go against well capitalized companies. Also, given the rumors that Eisman fed the government info but was privy to their planned actions before they came public, I would surmise the FTC will be gun shy in following a HF into battle.

So, unless you think the FTC will take action, I don't think there's a ton of downside from here.

I don't think Ackman was questioning the profitability of HLF. He felt they were mis-stating financials to make it look like more was coming from retail rather than "internal" sales. If distributors want to buy a ton of supplements to make their targets to get paid out, that probably doesn't stop unless the FTC decrees that this is a pyramid scheme and shuts them down.

Sure, they can't keep moving into new geographies indefinitely and CF won't continue to grow so rapidly.

Looks like they've done $400m of FCF annually in recent years, and the stock trades at 11% FCF yield... maybe that gets to 15% which would be a $23.50 stock.

It's going to quickly become a crowded short, and I think you need government action to push this thing much lower (which again, I think is unlikely). I'm not a buyer here, but would not get short either.

Ya that's sort of the analysis I thought up as well. They are quite in the grey area and with the current valuation until/unless FTC digs into them they likely won't close for business. That is assuming Herbalife brand isn't completely destroyed and fail to find fresh meat to make money from.

 

His thesis hinges on some regulatory body shutting Herbalife down. As was said, this isn't a sure thing.

But the presentation is fantastic. The nutrition club thing is insane. I am not even sure I understand their existence. You can't make a profit, you can't have signs or branding, you cannot even post operating hours. "Nutrition clubs" in Mexico have a per capita distribution equal to the top 14 fast food franchises in the US - combined.

 
West Coast rainmaker:
But the presentation is fantastic. The nutrition club thing is insane. I am not even sure I understand their existence. You can't make a profit, you can't have signs or branding, you cannot even post operating hours. "Nutrition clubs" in Mexico have a per capita distribution equal to the top 14 fast food franchises in the US - combined.

Completely baffling. I was honestly losing my shit with shock, laughter, and dismay when I read through that. Literally no idea why anyone would ever be involved in that. Simply insane.

 

I don't usually like shorts because "the market can stay irrational longer than you can stay solvent" and this has been true for Herbalife practically since they started doing business. I have no position on the stock. That said, Herbalife basically sells scientifically proven snake oil. It's probably easier and healthier to lose weight using a cookies + multivitamin diet. It's certainly easier and wealthier to build a better body by replacing any of their products with protein + fish oil + multi (or vegetables).

I find amusing that the bullish analysts on the stock apparently don't know that. I mean, what do they do all day? Random teenagers at bodybuilding.com probaby have more information on current research for Herbalife products nutritional values than it's analysts. That is so weird. Their recommendations should have a disclaimer with something like it is important to mention the company has a pyramid structure for selling useless products.

Yet, people may be fooled for a long while (i.e. Allied vs Einhorn). Ackman's high profile may hurt the company's stock, but somebody who shorted that stuff from 2009-2011 probably lost a lot of money.

 

I wouldn't do this. An MBA without prior work experience has little value. Not saying it doesn't happen, but I've never seen anyone in an IB job with a 3-2 degree or a straight-from-undergrad MBA. You could arguably make things way worse for yourself, because you don't fit into the conventional box for analyst or associate recruiting.

 
Best Response

Someone is trying to give you good advice. You might want to take it (and save yourself time, money and disappointment), rather than lashing out because it doesn't confirm your narrative.

IB might be a little different from other parts of the corporate world in that keeping the job is at least as hard as getting the job. Maybe you can do this 3-2 thing and skip the analyst program, but you will then be in a cohort of associates with way more experience (and maturity) than you, and you'll be competing against them for bonus dollars, and eventually - if you make it that far - VP slots.

And for what? You'll have paid for an extra year of school that could have been spent working and actually making money, potentially putting yourself at a recruiting disadvantage, and all for a degree that is no longer required for an associate promotion anyway.

 

look into LACs. i think haverford and middlebury have similar programs for engineering, not really finance related, but good for stem i guess. if i recall correctly, you can do a middlebury 3+2 at columbia and get like a "financial engineering" degree. not an MBA, but still two impressive schools.

 

Those 3/2's won't land you an IB Associate position. I know a guy who graduated from there a few years ago and he got an analyst position at a high-tier MM shop. Never got the impression any of them become associates, WS views them more or less like MSF students.

 

Interested as well.

"The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males."
 
BradyisnotMVP:
Interested as well.

LOL.

PD: I was short HLF 5 days ago.

[quote]The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.[/quote]
 

Herbalife is going down my town had Herbalife everywhere people becoming distributors quit their jobs and fail I seen the bs they do to get people signed up I believe it us a pyramid scheme but in tge end we will see.

 

I'm not with Loeb or Ackman sorry. HLF isn't a zero. It also isn't a strong company either.No way in hell i'd be touching this stock. HLF is a craze created entirely by the fact that customers can be distributors. Once they get over the fact that it isn't really a legitimate way to make money and that the customers realize that they are getting ripped off. Things will slow down. I can see how HLF seems compelling because your closest friends will be marketing the product to you directly and can market based on how they know you. However I do not think that the craze will continue. A lot of my friends stopped doing it when they realized it wasn't worth their time and they didn't make money. The next good supplement will come along and take it out with ease.

 

This is great, two titans duking it out. It's the type of thing you read about from eras past, and makes for a great story.

Winner: HLF Runner up: Loeb Loser: Ackman

No way I'd go near the company, but it's not worthless.

Get busy living
 

No skin in this game luckily, but my take on it is that while HLF isn't completely worthless, I've gotta agree with the shorts. It's not a business that will withstand the test of time... but on the other hand I could never put a number on its actual value or when it will blow up, so I don't have the balls to consider doing anything about it. This should be fun to see play out though.

I hate victims who respect their executioners
 
BlackHat:
No skin in this game luckily, but my take on it is that while HLF isn't completely worthless, I've gotta agree with the shorts. It's not a business that will withstand the test of time... but on the other hand I could never put a number on its actual value or when it will blow up, so I don't have the balls to consider doing anything about it. This should be fun to see play out though.

I've heard a few people say it cant withstand the test of time. Without really knowing anything about it, the company has been around for 32 years -- very very long time for a pyramid scheme. That doesn't mean the scheme (if there is one) couldn't start early, I just don't get how people say it can't withstand the test of time.

 

I believe Ackman will be proven correct in the long run, but I wouldn't be comfortable entering a short position unless I could enter at 50+.

Also, I disagree with the opinion that Ackman is betting solely on the FTC or SEC to take action against HLF. The true catalyst in this trade is that exposure of HLF as a pyramid scheme will severely affect the distributor base. If Ackman is correct in stating that only a 2% of distributors are actually making money, then I cannot see why the other 98% percent would stick around. I expect that the next few quarters will show significant erosion to HLF's distributor base, which will swing the pendulum back in Ackman's favor.

 
glide9811:
Also, I disagree with the opinion that Ackman is betting solely on the FTC or SEC to take action against HLF. The true catalyst in this trade is that exposure of HLF as a pyramid scheme will severely affect the distributor base. If Ackman is correct in stating that only a 2% of distributors are actually making money, then I cannot see why the other 98% percent would stick around. I expect that the next few quarters will show significant erosion to HLF's distributor base, which will swing the pendulum back in Ackman's favor.

I think this is right. Or the right answer to the question "can you make money shorting from here".

I wouldn't want to be short ahead of tomorrow when HLF announces a huge buyback, but does this publicity harm HLFs ability to find new distributors? Not that your average Joe is reading the WSJ, but you'd expect people to at least Google Herbalife, and if the top hits are about someone accusing the company of being a pyramid scheme, that can stop the marginal distributor from joining.

If Ackman is correct, that the only way people make money is by recruiting new distributors, then the business gets incrementally harder. HLF has a lot of cash that it can burn through supporting the stock, but I would hate to be long if quarterly results start showing deterioration.

Case in point - For-profit education. The stocks aren't going to zero, but they had to increase cost to comply with some new regulatory scrutiny, and more importantly, they've seen a drop off in new enrollments (which I would argue is at least in some part due to the regulatory oversight / media coverage).

 

Ackman actually had two arguments, a fact people seem overlook. The first is that Herbalife is a typical illegal pyramid scheme which will be shut down. And if it is not shut down, the business will prove unsustainable because few people use the products.

The second is that the firm is running out of new markets, and its old markets are shrinking. The economics of the business are not good, and efforts to demonstrate strong growth involve constant "pops" by entering new regions. There aren't many new regions left, and the company's growth will soon slow dramatically, even if the business is not shut down for being a pyramid scheme, and even if enough "distributors" turn out to be just users of the company's products.

 

Some observations:

  1. Whitney Tilson's head must be exploding. When you make your entire career of mimicking Einhorn/Ackman/Loeb and then they are on the opposite side of a trade what are you supposed to do??? The only certainty is that he will find a way to lose money on it.

  2. I think a short squeeze is possible but don't think we will see anything ridiculous. SI is 26% of the float, Ackman is 20% by himself. That means there are roughly 6mm shares sold short that aren't Ackman. Even if HLF comes out tomorrow and proves that distributors get more money from product sales rather than recruiting, and they announce a buyback, it would be hard for 6mm shares to cause a large short squeeze. I'm seeing avg daily volume over the last 3 months of 6.1mm shares. Ackman said he won't cover until 0. I don't know if thats true, but I doubt he will cover in the next few months.

  3. Third Point and Pershing Square are about the same size, so this a 10% position for Ackman and 3-4% position for Loeb.

  4. Ackman has lost billions on an individual stock before. Pershing Square IV was basically just Target and a shitload of Target calls. He lost billions and sidepocketed it all. He still runs a $11bn fund.

  5. Ackman was an ardent defender of Prepaid Legal Services in 2004. Does anybody have a copy of the slide deck? I would love to see it.

I don't have a position, but am tempted to make it a 1% long, its basically a call option at this point. I by no means think this is a good business, but the story will last for at least a few more years. There are 7bn people in the world - thats a lot of people to con. Only 20% of the revenue is in the US, and I think the majority of that is in the Latino community. I'm guessing the average HLF distributor has no idea who Bill Ackman is, and even if they catch wind of this, they will probably think "he is just some evil banker trying to destroy a great opportunity" There will be lots of kool-aid events in the next few months to make sure they don't lose the base.

I would highly recommend this:

http://brontecapital.blogspot.com/

and the VIC thread on BTH that morphed into a discussion into a discussion on HLF

 
Gray Fox:
Some observations:
  1. Whitney Tilson's head must be exploding. When you make your entire career of mimicking Einhorn/Ackman/Loeb and then they are on the opposite side of a trade what are you supposed to do??? The only certainty is that he will find a way to lose money on it.

LMAO I had the exact same thought while on the desk today. Any analyst working for him, not sure how they respect themselves in the morning..

 
Gray Fox:
Some observations:
  1. Whitney Tilson's head must be exploding. When you make your entire career of mimicking Einhorn/Ackman/Loeb and then they are on the opposite side of a trade what are you supposed to do??? The only certainty is that he will find a way to lose money on it.

  2. I think a short squeeze is possible but don't think we will see anything ridiculous. SI is 26% of the float, Ackman is 20% by himself. That means there are roughly 6mm shares sold short that aren't Ackman. Even if HLF comes out tomorrow and proves that distributors get more money from product sales rather than recruiting, and they announce a buyback, it would be hard for 6mm shares to cause a large short squeeze. I'm seeing avg daily volume over the last 3 months of 6.1mm shares. Ackman said he won't cover until 0. I don't know if thats true, but I doubt he will cover in the next few months.

  3. Third Point and Pershing Square are about the same size, so this a 10% position for Ackman and 3-4% position for Loeb.

  4. Ackman has lost billions on an individual stock before. Pershing Square IV was basically just Target and a shitload of Target calls. He lost billions and sidepocketed it all. He still runs a $11bn fund.

  5. Ackman was an ardent defender of Prepaid Legal Services in 2004. Does anybody have a copy of the slide deck? I would love to see it.

I don't have a position, but am tempted to make it a 1% long, its basically a call option at this point. I by no means think this is a good business, but the story will last for at least a few more years. There are 7bn people in the world - thats a lot of people to con. Only 20% of the revenue is in the US, and I think the majority of that is in the Latino community. I'm guessing the average HLF distributor has no idea who Bill Ackman is, and even if they catch wind of this, they will probably think "he is just some evil banker trying to destroy a great opportunity" There will be lots of kool-aid events in the next few months to make sure they don't lose the base.

I would highly recommend this:

http://brontecapital.blogspot.com/

and the VIC thread on BTH that morphed into a discussion into a discussion on HLF

+1 for Tilson

 
Gray Fox:
Some observations:
Agree on every point, including the kool aid sessions....especially the kool aid sessions.
KarateBoy:
I hear you on the first point but couldn't this be something as simple as "this independent 3rd party is giving us a stamp of a approval".
Basically, yes, that's how they're going to pitch the legion of morons who buy their crap.

Going to war with an MLM is like going on Jerry Springer to argue with an ex: you lose by virtue of showing up

Get busy living
 

Man, this one kills me. I remember when I saw Ackman's presentation and it was so crystal clear how little substance there was. I really wanted to buy but couldn't convince my boss to pull the trigger once the dust settled...completely disagree with the idea that the business is unsustainable. As to the person who asked what the other 98% of distributors who don't make money do, I'd say...they drink the shakes.

 
xqtrack:
Man, this one kills me. I remember when I saw Ackman's presentation and it was so crystal clear how little substance there was. I really wanted to buy but couldn't convince my boss to pull the trigger once the dust settled...completely disagree with the idea that the business is unsustainable. As to the person who asked what the other 98% of distributors who don't make money do, I'd say...they drink the shakes.
It ain't over yet, but I tend to agree with you. We will see once the SEC is done with them
 

It's clear a lot of people on this thread haven't actually read how herbalife distributors make money. There is absolutely no profit in any sense of the word in simply recruiting new distributors. They do not get a single penny for bringing someone into the business. The only way they can make money is in two ways:

1) they sell product on their own behalf. They can buy and use for themselves and sell to outside customers.

2) they make money from a percentage of the business the distributors they recruited bring in. So for example, if one of the distributors they signed up did $5000 worth of business in one month, they would earn a small percentage (around 3-5%).

Herbalife has been around for 30 years now and is in 80+ countries. The main incentive is to make sure the people you bring in are successful and make a lot of money because that can be highly lucrative and provides a stream of residual income.

"You stop being an asshole when it sucks to be you." - IlliniProgrammer
 

Jesus christ Herbalife haven't learned their lesson from Ackman's presentation. They are still using hired guns throughout this presentation to try to prove a pnt. If they wanted to prove its not a "pyramid" scheme they should have bought a lawyer to explain the legal language and rules of what warrants a pyramid scheme and how it relates to herbalife. Instead they bring in a business school professor who sometimes slips and calls Herbalife "we"

 

Wasn't the biggest fan of the presentation, but I think they did a good enough job to relieve the skeptic longs and the distributors a bit. I don't like any company that needs to address why they aren't a scam, obviously, but what's more disconcerting is the need to bring in Lieberman and all this shit like it somehow validates the entire business. Loved the "hugs" comment though by the dude with the gay Irish accent.

I hate victims who respect their executioners
 
BlackHat:
I don't like any company that needs to address why they aren't a scam, obviously, but what's more disconcerting is the need to bring in Lieberman and all this shit like it somehow validates the entire business.

Couldn't agree more.

"When you expect things to happen - strangely enough - they do happen." - JP Morgan
 
BlackHat:
Wasn't the biggest fan of the presentation, but I think they did a good enough job to relieve the skeptic longs and the distributors a bit. I don't like any company that needs to address why they aren't a scam, obviously, but what's more disconcerting is the need to bring in Lieberman and all this shit like it somehow validates the entire business. Loved the "hugs" comment though by the dude with the gay Irish accent.

I hear you on the first point but couldn't this be something as simple as "this independent 3rd party is giving us a stamp of a approval".

I think it's better than saying "we're giving ourselves a stamp of approval".

Then again, i think it's convenient that they had the survey done in early 2012.

Follow me on Twitter: https://twitter.com/_KarateBoy_
 

What sane person gives a fuck about this shit anymore. It's just a hack of a company and a senile self absorbed old man fighting from their boardrooms.

Follow the shit your fellow monkeys say @shitWSOsays Life is hard, it's even harder when you're stupid - John Wayne
 

Honestly, would be surprised if they came up with anything. Ever since Ackman called them out I'm sure they have been diligently working to rid their business of anything that could make his theories hold true.

Granted, I think these multi level marketing firms are such a scams (Veema, Herbalife, etc.) I'm not sure you can go as far as to call them pyramid schemes.

Frank Sinatra - "Alcohol may be man's worst enemy, but the bible says love your enemy."
 
yeahright:

Honestly, would be surprised if they came up with anything. Ever since Ackman called them out I'm sure they have been diligently working to rid their business of anything that could make his theories hold true.

If they got rid of anything that could make his theories hold true, their numbers would reflect that - sooner or later. The entire point is that they're misrepresenting their business model in the financial statements. Also, even if they did change their business model, their forecasted earnings notwithstanding, they still have previous reported statements which will evidence any possible fraud.

 

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"Look, you're my best friend, so don't take this the wrong way. In twenty years, if you're still livin' here, comin' over to my house to watch the Patriots games, still workin' construction, I'll fuckin' kill you. That's not a threat, that's a fact.
 

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