Has the HF titan gotten himself in over his head with this billion dollar short position? What do you guys make of a 25% gain in the stock in the course of a day during and after his presentation? Blowing smoke?
Any thoughts?
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I'm sort of torn on HLF. on the one hand, multi level marketing is a shitty way to run a business, on the other hand it's legal and I believe HLF is no different than advocare, mary kay, or tupperware, the only difference is they happen to be the only one being shorted by Ackman. I'm not proficient in shorting, but I'd imagine that he got crushed today.
He also said that if the DOJ or whomever determines its a legitimate business he will lobby Congress to change the law. He's definitely taking this as he says "to the end of the earth"
Pershing Square is also paying out dividends on $1B of HLF stock, keep in mind he shorted for the first time in the mid-high 40's
He's already lost his investors over 1/2 billion on this single trade alone and counting. This dumbfuck won't be happy until he loses the whole billion.
that's stupid, it would then render those other 3 companies illegal. I'm not saying I disagree with the concept of making MLM illegal, but I don't think this is a good use of investor funds. but then again, I've never understood activist investing outside of PE, so I'm biased.
I agree HLF is similar to those companies, but what swung me to agree w/ Ackman initially was the compensation set-up (more tied to bringing people into program than selling actual product). But for all I know, he might be able to make that argument with the Mary Kay et al. And although I haven't seen this latest presentation yet, it seems the market isn't impressed by that line of reasoning.
On a side note, during the recent HLF conference in Chicago my neighborhood got inundated w/ Herbalife leaflets. They're cranking it to 11 right now.
He's up against stronger hands, same story as it was when this began. Just market mechanics at work.
He made the expectations for yesterday's presentation out to be a once in a lifetime game changer. When he (apparently failed to deliver), the market hit back hard. Also, if the gov investigations clear them, it will squeeze the shorts and fly.
Ackman lost a ton of credibility after getting everyone excited for this last presentation. You will not believe this! There are uneducated morons working for peanuts at the bottom of multi-leveling marketing schemes!!
Doesn't seem like anything new to me and for some reason Ackman can't get a grip on this.
I think MLM's a scam. I've seen some of my IQ challenges FB friends from high school get involved in a few and it's like they drank the kool-aid. They may have a good product (any MLM could) but the marketing is sketchy. But I don't really understand Ackerman's strategy on this. Activist investing IMO shouldn't pursue a short strategy. Sure, short a stock if you think it's going down because of fundamentals or even announce something but it seems like he's beating a dead horse (or maybe trying to trip a horse-you're just going to get hurt when it runs you over). You can't force change, install your people on the board or do the normal long activist strategies. And making the speech of his life and comparing it to nazis is just hyperbole. It just seems like his ego's gotten in the way and he's chasing it simply because he doesn't want to lose and he already lost.
And I'd never purposely go on the other side of the table as Icahn. Ackerman's rich and powerful but Carl can crush him before he has his morning coffee.
Exactly. Not to mention he's also on the other side of the table as Dan Loeb and Soros. Illiquid short against very strong hands is a poor recipe for success IMNSHO.
This might be a stupid question but can someone explain what exactly multilevel marketing and pyramid schemes are? Maybe I'm having an off day but the wikipedia definition isn't resonating with me.
Pay me $10 and get 5 other people to give you $10 each (I'll get 50% of that), and then I'll tell you
Basically someone gets me to sell the company's product who's a salesperson as well (not a corporate recruiter) and often I pay an upfront fee for marketing instructions/material, product or some BS that I can show to potential customers. I sell product, but one of my major goals is to recruit other people to sell under me because I get a cut of everything they sell and a cut of what everyone they recruit sells (and typically a piece of the upfront fee). Just like the guy who recruited me gets a piece of what I sell and what everyone below me sells. The argument against them, and it's largely true for a lot of MLM's is that you make more money recruiting people to pay the upfront fee than you concentrate on selling product, it targets poorer people to get that fee from, and the people who pay the fee don't make any money off of selling the product.
Best laugh I've gotten in a while from watching his presentation. Just wish I could've been on the receiving end on some of that $50MM research budget
Pershing is up nearly 25% YTD and is crushing it otherwise. You'd be better off investing in his other positions then wasting time with HLF. MLM is a sleezy business (IMO) but I would doubt FTC accuses HLF of a pyramid scheme. It would be more likely Ackman catches them on some labor law violation or some accounting law they broke.
I mean they are a sleezy company and maybe they run out of emerging markets to sell crap to at some point. Who knows but you have to respect Bill's Power Point skills. Stock would have collapsed if he transitioned with more star sweeps instead of generic click.
Didn't he restructure his short so that now he only owns puts?
I happened to catch the presentation yesterday and I am convinced Mr. Ackman is making the correct call here. If you didn't have a chance to watch it, I would HIGHLY recommend it.
What it boils down to for me is that there is a greater incentive to recruit new members as opposed to just selling. Just selling is a relatively unprofitable venture. Moving up the ranks in this internal scheme requires you to go to "training" which basically puts money in the hands of the top of the pyramid. Some of the trainings included tasks such as making 10 shakes which the trainee would pay for (i.e., increasing HFL's top line). These are artificial sales that the company is basically forcing people to make.
The problem is HLF is targeting the poor, Hispanic population and basically marketing this as their only chance at the American Dream.
The presentation gives a overview of the whole picture. Give it a listen and then make your call... I say with so much smart money on both sides of the trade, the risk/reward is not worth it.
"Over promised, Under delivered" I can't believe I wasted 3 hours of my life watching the presentation. He would need a REAL death blow next time. Also, Christine Richard had no confidence during her presentation.
I have a hard time believing Ichan when he says he thinks HLF is a great company.. If Ackman would've never gotten involved I think its safe to say Ichan or Soros wouldn't have either. Just for the record I've been following this story only since the big dispute on CNBC and I think Ackman is making the right call on HLF, but whether or not the market agrees with him before his put options expire is a different story
Also, I haven't heard a compelling argument from Johnson or any other execs as to dispute the claims Ackman makes besides the "were a product company" line. Along with the fact that no one can really get solid numbers out of HLF as to the number of recruits who drop out in the first 6 months, how many actually make a living, etc.
But I do agree the presentation was way too hyped up for the content, nothing ground breaking. Financially unsophisticated people lose money by buying into MLM companies.. no shit?
I don't disagree that HLF could be a shitty company and most MLM's are but as @thebrofessor said, it's legal. Ackman could be, and probably is, correct, but as my grandfather used to say that a quarter gets you on the bus. I've only followed this on the peripherary so I don't know all of the details and I'm sure that HFL is targeting low income Latinos and exploiting emerging markets. But the MLM strategy is legal. It might not be right, they could all be scum sucking dirtbags but when you're making a stock trade with other peoples money and there's essentially an infinite amount of other investment options it seems stupid to double and triple down. He's a smart investor. He shouldn't let ego get in the way.
Shitty MLM company who targets low income poorly educated people around the world (legal), or fraudulent pyramid scheme (illegal)? I guess we'll hear from the DOJ or FBI eventually, but I'm sure Ackman won't stop shouting until then
if they outlawed every business that targeted poor & uneducated people, we wouldn't have fast food, tobacco, half of Nike, alcohol, gambling, dollar stores (DLTR, FDO), etc. supply & demand
Alcohol dude? I'll give you the others...
In addition there are publicly traded pawn shops and pay day advance lenders (and obviously tons of private ones and it's all legal). If they don't prey on the poor I don't know know what does.
At least in those cases money is being exchanged for a good or service which is clearly defined and understood by both parties. The issue with HLF is that people aren't exchanging their money for the good, but for a business opportunity that frankly doesn't exist.
I guess my logic begins to fall apart when you look at payday lending and pawn shops since they clearly function based on the assumption that people have no idea how interest works, but at least there money is being loaned to a person who needs it.
I get it, my point was that if he's attacking them for preying on the poor, he's wrong. plenty of businesses prey on the poor. if he wants to get on them for being MLM, I think that argument's wrong too simply because we currently allow MLM in the US. I think his argument is good in spirit, but not good enough to use shareholder funds for. Again, I personally think all MLM should be illegal. if the product was so good, they'd sell it at GNC, Publix, Bed Bath & Beyond, wherever. it's a shitty business model, but as long as it's legal, Ackman has an uphill battle.
I don't think you can look at Ackman's points separately like that - laws against pyramid schemes are designed to protect the public, and his attack on HLF here is essentially twofold:
HLF is a MLM scheme that derives the bulk of its revenue from recruiting rather than product sales, which makes it an illegal pyramid scheme and is a harm to the general public. While MLM is not illegal per se, they become illegal if they derive most of their business through recruiting rather than moving product.
Within the general public, HLF targets the poor, who are especially harmed by the economic losses (a $1000 loss to a poor person means a lot more than a $1000 loss to a 1%'ER). There's nothing wrong with a business's target demographic being poor people, but there is a heightened sense of urgency when an illegal scheme targets the poor.
So this special urgency is why the government must get involved, or so Ackman's argument goes.
Regarding your point on payday lending/pawn shops, while I am sure that there are some (many) unscrupulous payday lenders, I think that if you had a totally honest payday lender, he would still be justified in charging pretty high interest rates. For one thing, the interest rates are high for a reason (people who don't understand how interest works are pretty risky credits).
And unlike MLM's, I think there's a good reason that you point out for why you could never get rid of all payday lenders - poor people still need cash advances. On the other hand, if you got rid of every MLM scheme, people could still get their hands on the basic good being sold (go to GNC for your nutritional products... as if people weren't doing that already, go to Macy's for your make up instead of Mary Kay, etc.)
I really hope companies similar to HLF will fall with it.
1) Akman's presentation skills are pretty weak, that was quite disappointing. It's not like he is a great speaker so I think that doesn't help him 2) The overall focus on poor / low income population is irrelevant 3) In my view MLM should be illegal when there is no demand or you can prove that all sales are due to people becoming distributors with the hope of finding people to re-sell and other distributors. If you can prove that there is demand from normal consumers then it should be allowed
I think MLM worked well when tupperware came along, not so much anymore. the thing is none of the products in the big MLM schemes (schema?) are unique. advocare & HLF products can be easily outdone by a trip to GNC, vitamin shoppe, etc. there's dozens of makeup companies (Mary Kay isn't alone), and Amway is just a conglomeration of all sorts of shit you can buy if you just get off the couch. I hope MLM eventually gets outlawed, but it's no skin off my ass, I'm never buying any of that stuff.
I actually find Ackman's arguments very compelling.
I'm convinced, at this point, that he wants Herbalife to sue him so he can go through a process of discovery and get the real goods out there. The fact that Herbalife won't simply sue him for defamation is a sign against them, in my view.
Good comment thread. I'd be interested to hear what Ackman thinks about Amway et al., because unless I'm missing something he's going for destroying HLF, not the idea that MLM can be a legitimate business i.e., this isn't an attempt to change the current MLM laws. Rather, Ackman is (attempting to) help himself by helping the government understand the fraudulent aspects of HLF. If the government bites, they may look at the breakdown of affiliate compensation between sales commissions and downline commissions, and predatory sales techniques to add affiliates e.g., the Latino market. Any other analyses the government could perform to penalize HLF? And for those of you who agree with my logic, do you think it's more likely that sanctions result in HLF being shut down, or changing some parts of the program?
Comment above notes that he's mentioned if HLF is deemed legal, he will be lobbying Congress etc to change the laws and make MLM (I assume) illegal.
My opinion, for what it's worth: HLF is a scam, but it's a profitable scam, so it will probably stay around.
Edit: One other comment. Something that concerns me about Herbalife is how their investor relations has responded to all of this. What I'm talking about is how they're calling out Ackman by name and defending their stock so vigorously. It always seems like scam companies do this. If someone shorted Johnson & Johnson or GE, they'd just say "we don't comment on short term price movements", end of statement.
Sounds a lot like David Einhorn's experience in "Fooling Some of the People All of the Time"
Also - HLF's products are overpriced when compared to products that do the exact same thing (i.e. shakes / powders from Slim Fast or GNC).
They sell a business opportunity that isn't an opportunity at all. Most of the revenue comes from recruiting and forcing new recruits to attend classes and buy product, not from sales. That's why it's a pyramid scheme.
When I noticed that my housekeeper was selling HLF products, I knew it was a scam...dead serious.
It's sad but Im not surprised
What if Ackman's real intention is to persuade the poor/latinos to not join HLF, so as to hurt HLF's top/bottom lines? (not sure if the time constraint of his shorts allow that though)
I highly doubt the poor know who Bill Ackman/Pershing Square is, much less would the poor read his commentary on HLF. He's trying to make money for investors by exposing what he believes is a fraudulent enterprise. One thing to keep in mind folks is that recruitment entails new HLF members to purchase product from HLF or a distributor, so recruitment is actually product sales. the issue with this is most of the product never ends up being sold to the end user, which is likely why these companies won't disclose end user sales data (or they don't track it, whatever). I haven't analyzed tupperwares financials in detail (only other large publicly traded MLM company that I know of), so I have no idea if getting more revenue from product sales to distributors (essentially recruitment) is normal or not. If somebody wants to take a crack at it, here you go: http://ir.tupperwarebrands.com/secfiling.cfm?filingID=1008654-14-4&CIK=…
full disclosure, you might not find anything because I seem to remember HLF saying something along the lines of not disclosing sales of their salesforce to consumers, because they're largely independent of HLF, they only track sales from home office to distributors (a key tenet of MLM), so this could be an unsolvable argument in the end.
MLM should definitely not be legal. Put the product on shelves in the vitamin/drugstores and if the product is truly revolutionary/life-changing IT WILL SELL. Ackman is right, $HLF is a bonafide scam.
Bronte Capital's written response to Ackman's presentation was really poor. Somehow John connected aboriginal babies being kidnapped and Australian welfare to the current happenings of HLF. My understanding is to sound like an old wise man who has "seen things" or something similar and then makes an order of magnitude leap of logic that somehow Ackman wanted a woman suffering from diabetes to die. That's just ridiculous.
I think the fact that a company like Herbalife is profitable means that if an Ignorance Index existed it would make you very, very, very rich.
HLF products suck. There’s no doubt about it to whoever has in depth understanding of nutrition and cost-benefit analysis.
Yet, people buy lottery tickets and try to multiply their money on casinos. Those prey even harder than HLF. As long as they generate CFs, they will have value. HLF generates CFs, maybe by preying on people, and so the company has value.
HLF distributors and users like the company, maybe just like gamblers like casinos. Those people vote and they will be pretty mad if the government goes hard after HLF.
Even if the government goes hard against HLF, which is highly unlikely, this will mainly affect the US market. Asides from some panic selling, I doubt this can be enough of a long run dent on CFs to get Ackman’s money back.
MBIA was a true fraud and even MBIA fell only when the crash came. Maybe they could make Ackman bleed a few extra years. Shorting is a dangerous game. Shorting a global company filled with CFs and a strong brand power based on an attempt to make the government work is extremely dangerous.
As a side note, banning that kind of business goes pretty far against free markets and free speech. Maybe the government could make MM companies be more upfront about median distributor incomes and such. That’s more reasonable. Once you start banning stuff it’s pretty hard to draw the line and, as Ackman surely have noticed by now, there is a huge market for MM businesses worldwide.
I actually flipped through his presentation (haven't watched the video yet but will soon) and I was pretty convinced that their main strategy is continuing that pyramid setup (making new recruits go around and 'test' from existing nutrition clubs especially when its simply a powder mix, nothing complicated).
Just looking at the reaction, I don't think his presentation failed but it simply seems to have underwhelmed as the stock price is back to where it was prior to he announced his presentation and would have rallied far past it if he fully failed.
Just wondering though, any chance HLF timed share buybacks with the start of the presentation and essentially squeezed out weak shorts? The timing of the rally started exactly at 10am, Ackman probably hadn't even said a word at that point.
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