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Einhorn Crushes HLF
 

KarateBoy's picture
AM
 
Points)
 on 5/1/12 at 5:12pm

How funny would it be if he was asking questions to validate a long thesis? He's getting the stock 20% cheaper.

http://www.businessinsider.com/david-einhorn-herba...

Tags:
YGCS's picture

I own HLF. Bleeding badly

AM
(Baboon, 108
 
Points)
 on 5/1/12 at 8:32pm

I own HLF. Bleeding badly today. I am holding on to it though. Good idea?

Will the company disclose those distributor percentages tomorrow?

U Accrete Me's picture

I would LOVE to work for

IB
 
Points)
 on 5/1/12 at 8:54pm

I would LOVE to work for einhorn!

KarateBoy's picture

Me, you, and just about every

AM
 
Points)
 on 5/1/12 at 9:06pm

Me, you, and just about every single other equity analyst. These guys are more powerful than Buffett.

Gray Fox's picture

My initial observation was

HF
 
Points)
 on 5/1/12 at 9:46pm

My initial observation was that the move today was irrational. I'm familiar with how successful Greenlight has been with their shorts (Allied, Lehman, Green Mountain, etc), read his book, and would not want to be on the other side of a trade. That being said his questions were relatively innocuous - the distributor mix at the low end is important to the growth of the business but is not a GAAP line item that would be skewed and indicative of accounting fraud. Most of the big ones he has nailed have been actual accounting frauds. There is a very legitimate chance that the CFO digs up the relevant figures, they have deteriorated slightly but there is nothing illicit going on, and the stock slowly recovers.

All of that being said, I doubt Einhorn himself would be on the call unless something big was in the works. I see this playing out one of two ways.

-Greenlight is short. HLF gets back to him and other investors with the distributor mix and is very transparent about things. The stock suffers a bit but many of the shorts cover. Einhorn made a nice little profit and the world goes on its way.

-Greenlight is short. HLF isn't forthright with disclosure on the distributor mix or there are more accounting issues. There are 15 days until the Ira Sohn conference. This could very well be a grace period for HLF to make things right. If not, Einhorn goes into full out assault mode and HLF gets ripped to shreds at the conference. If a few questions on a call are enough to send the stock down 20%, I can't imagine how ugly it would be off of a full short thesis.

The idea of him being long and manipulating the price for an entry point seems like a very low probability event to me. He seems like too much of a stand up guy. I doubt it would be legally awry, but after the whole mess with Punch I don't think they want another headache.

HarvardOrBust's picture

Gray Fox: My initial

PE
 
Points)
 on 5/1/12 at 10:03pm
Gray Fox:

My initial observation was that the move today was irrational. I'm familiar with how successful Greenlight has been with their shorts (Allied, Lehman, Green Mountain, etc), read his book, and would not want to be on the other side of a trade. That being said his questions were relatively innocuous - the distributor mix at the low end is important to the growth of the business but is not a GAAP line item that would be skewed and indicative of accounting fraud. Most of the big ones he has nailed have been actual accounting frauds. There is a very legitimate chance that the CFO digs up the relevant figures, they have deteriorated slightly but there is nothing illicit going on, and the stock slowly recovers.

All of that being said, I doubt Einhorn himself would be on the call unless something big was in the works. I see this playing out one of two ways.

-Greenlight is short. HLF gets back to him and other investors with the distributor mix and is very transparent about things. The stock suffers a bit but many of the shorts cover. Einhorn made a nice little profit and the world goes on its way.

-Greenlight is short. HLF isn't forthright with disclosure on the distributor mix or there are more accounting issues. There are 15 days until the Ira Sohn conference. This could very well be a grace period for HLF to make things right. If not, Einhorn goes into full out assault mode and HLF gets ripped to shreds at the conference. If a few questions on a call are enough to send the stock down 20%, I can't imagine how ugly it would be off of a full short thesis.

The idea of him being long and manipulating the price for an entry point seems like a very low probability event to me. He seems like too much of a stand up guy. I doubt it would be legally awry, but after the whole mess with Punch I don't think they want another headache.

Nice. Very curious to see how this ends up.

blueslord2910's picture

I listened to it and read the

 
Points)
 on 5/1/12 at 10:30pm

I listened to it and read the scripts too. I do not understand why the stock dropped 20%

KarateBoy's picture

GF, I did not mean to imply

AM
 
Points)
 on 5/1/12 at 10:40pm

GF,

I did not mean to imply that Einhorn is trying to manipulate. I meant that its possible he was trying to develop a long thesis. His questions were pretty simple and that response from management did not sound like they're trying to avoid the issue.

Anyone on here submit an idea to Ira Sohn? I'm thinking about doing it.

macro's picture

Multi-level marketing stocks

HF
(Gorilla, 555
 
Points)
 on 5/1/12 at 10:46pm

Multi-level marketing stocks have defied gravity until now. On a purely numerical basis, they look very attractive, but it isn't difficult for someone to realize that fundamentally these businesses shouldn't be allowed to exist. 99.9% of distributors don't make money, and a majority of products are bought by those distributors, not end customers. These stocks have been putting up consistently good numbers, beating quarter after quarter, and in a market that is hungry for growth (especially in EMs) people will turn a blind eye and buy it. The irrationality has been going on for a while. It doesn't take much of a jolt to wake people up. It's not about the specific question that was asked. This is a situation where everyone knows the game will be up at some point, so when people see the first hint of smoke, they rush for the door because they don't want to be the last one out.

brandon st randy's picture

Gray Fox: My initial

PE
(Gorilla, 699
 
Points)
 on 5/1/12 at 11:17pm
Gray Fox:

My initial observation was that the move today was irrational. I'm familiar with how successful Greenlight has been with their shorts (Allied, Lehman, Green Mountain, etc), read his book, and would not want to be on the other side of a trade. That being said his questions were relatively innocuous - the distributor mix at the low end is important to the growth of the business but is not a GAAP line item that would be skewed and indicative of accounting fraud. Most of the big ones he has nailed have been actual accounting frauds. There is a very legitimate chance that the CFO digs up the relevant figures, they have deteriorated slightly but there is nothing illicit going on, and the stock slowly recovers.

All of that being said, I doubt Einhorn himself would be on the call unless something big was in the works. I see this playing out one of two ways.

-Greenlight is short. HLF gets back to him and other investors with the distributor mix and is very transparent about things. The stock suffers a bit but many of the shorts cover. Einhorn made a nice little profit and the world goes on its way.

-Greenlight is short. HLF isn't forthright with disclosure on the distributor mix or there are more accounting issues. There are 15 days until the Ira Sohn conference. This could very well be a grace period for HLF to make things right. If not, Einhorn goes into full out assault mode and HLF gets ripped to shreds at the conference. If a few questions on a call are enough to send the stock down 20%, I can't imagine how ugly it would be off of a full short thesis.

The idea of him being long and manipulating the price for an entry point seems like a very low probability event to me. He seems like too much of a stand up guy. I doubt it would be legally awry, but after the whole mess with Punch I don't think they want another headache.

Great analysis. The 20% drop is the market discounting the very real possibility that Einhorn is going to present a damaging thesis against HLF at the upcoming conference.

I find it amusing that HLF just so happens to report its quarterly earnings so shortly before the Ira Sohn conference. I think Einhorn is onto HLF and is going for an expose. The timing of the earning call allows him to give everybody a heads up on what he is up to.

I can tell you how I made each of my millions - but not where I got the very first

Gate_Crasher's picture

EDIT: Just saw the link.

IB
 
Points)
 on 5/2/12 at 2:02am

EDIT: Just saw the link.

Edit: Can someone please explain to me what does it all mean in a simple manner. I think I am missing on what the significance of the questions and answers are.

Thank you

Kenny_Powers_CFA's picture

Gate_Crasher: EDIT: Just saw

HF
(Neanderthal, 2,193
 
Points)
 on 5/2/12 at 8:27am
Gate_Crasher:

EDIT: Just saw the link.

Edit: Can someone please explain to me what does it all mean in a simple manner. I think I am missing on what the significance of the questions and answers are.

Thank you

His question has to do with two things primarily:
1) Distributor mix. It's important to know how a company gets its products to end-users, because this can have implications for sales timing, revenue recognition, working capital, and margin. Any time you have a non-typical relationship with your suppliers or distributors, there's potential for earnings manipulation because you can do things like use your leverage to force product into a distribution channel, creating additional sales for you in the short-term but "stuffing the channel" with excess supply in the longer-term.

To use a hypothetical example here, if HLF has 10,000 ladies who host herbalife parties and are selling it to their friends and family, HLF can "stuff the channel" by forcing or incentivizing them to buy, say, a 18-month supply upfront instead of a 12-month supply. This creates additional sales for HLF now (which they likely recognize immediately because they've moved the product and gotten paid for it) but means that those sales won't reoccur for over a year. (I don't know enough about HLF's business model to know if this is what's happening, just an example.)

For another example of why this sort of thing is important, read up on Greenlight's thesis on GMCR. A big part is growth potential (or lack thereof) but also important is the atypical relationship with their key vendor.

2) Quality of reporting. HLF used to disclose the distributor break-down; now they don't. The cynical interpretation is that the distributor mix has changed for the worse and the company is trying to disguise/hide this.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

Kenny_Powers_CFA's picture

Dealbreaker has a solid

HF
(Neanderthal, 2,193
 
Points)
 on 5/2/12 at 9:14am

Dealbreaker has a solid run-down as well:
http://dealbreaker.com/2012/05/david-einhorn-is-do...

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

duffmt6's picture

blueslord2910: I listened to

IB
(Neanderthal, 2,316
 
Points)
 on 5/2/12 at 9:34am
blueslord2910:

I listened to it and read the scripts too. I do not understand why the stock dropped 20%

Because Einhorn was the on the call and not one of his analysts. It was meant to make a point - the questions were somewhat inconsequential/innocuous but the tone was obvious.

"Social cohesion and puritanical morality place roughly on my list of concerns between whether I'll pick up jock itch at the gym this week (not likely, since I don't go the gym) and whether it'll rain in Christchurch, New Zealand next Tuesday."
-Eddie

Gate_Crasher's picture

Kenny_Powers_CFA: Gate_Cras

IB
 
Points)
 on 5/2/12 at 9:52am
Kenny_Powers_CFA:
Gate_Crasher:

EDIT: Just saw the link.

Edit: Can someone please explain to me what does it all mean in a simple manner. I think I am missing on what the significance of the questions and answers are.

Thank you

His question has to do with two things primarily:
1) Distributor mix. It's important to know how a company gets its products to end-users, because this can have implications for sales timing, revenue recognition, working capital, and margin. Any time you have a non-typical relationship with your suppliers or distributors, there's potential for earnings manipulation because you can do things like use your leverage to force product into a distribution channel, creating additional sales for you in the short-term but "stuffing the channel" with excess supply in the longer-term.

To use a hypothetical example here, if HLF has 10,000 ladies who host herbalife parties and are selling it to their friends and family, HLF can "stuff the channel" by forcing or incentivizing them to buy, say, a 18-month supply upfront instead of a 12-month supply. This creates additional sales for HLF now (which they likely recognize immediately because they've moved the product and gotten paid for it) but means that those sales won't reoccur for over a year. (I don't know enough about HLF's business model to know if this is what's happening, just an example.)

For another example of why this sort of thing is important, read up on Greenlight's thesis on GMCR. A big part is growth potential (or lack thereof) but also important is the atypical relationship with their key vendor.

2) Quality of reporting. HLF used to disclose the distributor break-down; now they don't. The cynical interpretation is that the distributor mix has changed for the worse and the company is trying to disguise/hide this.

Thank you for taking the time to explain that to me. I do appreciate your effort.

16rl's picture

anybody buying may the 19th

 
Points)
 on 5/2/12 at 10:56am

anybody buying may the 19th puts on HLF ?

monkeybusiness123's picture

Yeah and when Einhorn saw

IB
(Baboon, 171
 
Points)
 on 5/3/12 at 11:22am
brandon st randy's picture

Gray Fox: My initial

PE
(Gorilla, 699
 
Points)
 on 5/3/12 at 12:50pm

I can tell you how I made each of my millions - but not where I got the very first

Gray Fox's picture

BAGL up for strategic review

HF
 
Points)
 on 5/3/12 at 7:31pm
macro's picture

Very bearish price action in

HF
(Gorilla, 555
 
Points)
 on 5/3/12 at 9:10pm
KarateBoy's picture

Incredible. How can you not

AM
 
Points)
 on 5/3/12 at 11:42pm
alexdadda22's picture

Thanks for post. It’s really

(Chimp, 2
 
Points)
 on 5/7/12 at 11:01am

critical illness cover
critical illness quotes

16rl's picture

By the way, do you guys have

 
Points)
 on 5/9/12 at 1:41pm
BlackHat's picture

Think of it this way - if

HF
 
Points)
 on 5/9/12 at 1:49pm

I hate victims who respect their executioners

Follow BH & Co. on Twitter: @DumbLuckCapital
twitter.com/DumbLuckCapital

technoxplorer's picture

16rl: By the way, do you guys

(Chimp, 14
 
Points)
 on 5/11/12 at 1:55pm
16rl's picture

when you put it this way, my

 
Points)
 on 5/11/12 at 2:25pm
technoxplorer's picture

16rl: when you put it this

(Chimp, 14
 
Points)
 on 5/11/12 at 3:16pm
KarateBoy's picture

HLF saw a big move up

AM
 
Points)
 on 5/17/12 at 9:15am
Gray Fox's picture

The story is not over. At the

HF
 
Points)
 on 5/18/12 at 9:13am
16rl's picture

do u have access to the

 
Points)
 on 5/18/12 at 12:39pm
Summer Intern's picture

Blackhat, i also sent you a

IB
(Baboon, 103
 
Points)
 on 5/20/12 at 3:11am
Unforseen's picture

Gray Fox: The story is not

(King Kong, 1,099
 
Points)
 on 5/20/12 at 7:47am

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