Herba-Flight: Ackman vs. Loeb Cont.

jmr1991's picture
Rank: Baboon | banana points 121

Today is not a good day for Pershing Capital or Bill Ackman, as his short position on Herbalife (HLF) is looking progressively worse as closing time approaches. The session before he announced his short on December 18, 2012 saw a closing price of $42.50 and in the aftermath, it crashed 38% to around $26.06. So far, it has rallied 10.09% to a price of $44.06.

This, of course, says nothing about his questionable position in JCP, which has steadily fallen since Jan. 2. Additionally, Ackman's fund has underperformed over the past two years.

Dan Loeb (Third Point LLC), an outspoken rival of Ackman, opened a position with 8.9 million shares at the beginning of this year. Last year, his hedge fund beat the market and another of his funds saw net returns of 35%.

Is there any chance Ackman is right and the FTC will step in? Should he accept defeat and admit (with less than a 342 PowerPoint slide) that he was wrong?

What do you monkeys think?

EDIT: Unconfirmed reports suggest rally started with HLF dipping into their treasury stock budget.

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Comments (38)

Jan 14, 2013

I think Loeb should get out while he's ahead

Jan 14, 2013
BlackHat:

I think Loeb should get out while he's ahead

I disagree. Let's put a gentleman's wager on this, shall we?

Jan 14, 2013
DontMakeMeShortYou:
BlackHat:

I think Loeb should get out while he's ahead

I disagree. Let's put a gentleman's wager on this, shall we?

I've never touched an HLF annual but the way they're conducting themselves during this whole thing makes me have my reservations. Against my better judgment I'll take you up on that offer. The smell test says to me it's probably not a sustainable business

Jan 14, 2013
BlackHat:
DontMakeMeShortYou:
BlackHat:

I think Loeb should get out while he's ahead

I disagree. Let's put a gentleman's wager on this, shall we?

I've never touched an HLF annual but the way they're conducting themselves during this whole thing makes me have my reservations. Against my better judgment I'll take you up on that offer. The smell test says to me it's probably not a sustainable business

If we ever run into each other live, loser owes the other a drink. first to 70 vs. 20? How do we determine winner?

Jan 14, 2013
DontMakeMeShortYou:
BlackHat:
DontMakeMeShortYou:
BlackHat:

I think Loeb should get out while he's ahead

I disagree. Let's put a gentleman's wager on this, shall we?

I've never touched an HLF annual but the way they're conducting themselves during this whole thing makes me have my reservations. Against my better judgment I'll take you up on that offer. The smell test says to me it's probably not a sustainable business

If we ever run into each other live, loser owes the other a drink. first to 70 vs. 20? How do we determine winner?

Let's go with that. 52 week high is about 73 and that's where it was trending up right before Einhorn first put in his call, and 24 is the low here before the rebound... so 70 vs 20 sounds solid. Let's say the stock has to close above 70 or below 20 for a winner. And if I lose, I'm buying you one of these with a triple shot of something fancy in it: http://3.bp.blogspot.com/-CB-IffQIpZI/TWfricGRiWI/...

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Jan 14, 2013
BlackHat:
DontMakeMeShortYou:
BlackHat:
DontMakeMeShortYou:
BlackHat:

I think Loeb should get out while he's ahead

I disagree. Let's put a gentleman's wager on this, shall we?

I've never touched an HLF annual but the way they're conducting themselves during this whole thing makes me have my reservations. Against my better judgment I'll take you up on that offer. The smell test says to me it's probably not a sustainable business

If we ever run into each other live, loser owes the other a drink. first to 70 vs. 20? How do we determine winner?

Let's go with that. 52 week high is about 73 and that's where it was trending up right before Einhorn first put in his call, and 24 is the low here before the rebound... so 70 vs 20 sounds solid. Let's say the stock has to close above 70 or below 20 for a winner. And if I lose, I'm buying you one of these with a triple shot of something fancy in it: http://3.bp.blogspot.com/-CB-IffQIpZI/TWfricGRiWI/...
herbalife_batido_merengada_proteinas_niuna_dieta_mas1.jpg

Wonderful. That's my normal pre-game drink anyway. How else am I going to hit my daily protein consumption goals on the weekends?

Jan 14, 2013
DontMakeMeShortYou:
BlackHat:
DontMakeMeShortYou:
BlackHat:
DontMakeMeShortYou:
BlackHat:

I think Loeb should get out while he's ahead

I disagree. Let's put a gentleman's wager on this, shall we?

I've never touched an HLF annual but the way they're conducting themselves during this whole thing makes me have my reservations. Against my better judgment I'll take you up on that offer. The smell test says to me it's probably not a sustainable business

If we ever run into each other live, loser owes the other a drink. first to 70 vs. 20? How do we determine winner?

Let's go with that. 52 week high is about 73 and that's where it was trending up right before Einhorn first put in his call, and 24 is the low here before the rebound... so 70 vs 20 sounds solid. Let's say the stock has to close above 70 or below 20 for a winner. And if I lose, I'm buying you one of these with a triple shot of something fancy in it: http://3.bp.blogspot.com/-CB-IffQIpZI/TWfricGRiWI/...
herbalife_batido_merengada_proteinas_niuna_dieta_mas1.jpg

Wonderful. That's my normal pre-game drink anyway. How else am I going to hit my daily protein consumption goals on the weekends?

Shit... that statement alone already makes me regret doubting the Herbalife product.

Jan 14, 2013
BlackHat:
DontMakeMeShortYou:
BlackHat:
DontMakeMeShortYou:
BlackHat:
DontMakeMeShortYou:
BlackHat:

I think Loeb should get out while he's ahead

I disagree. Let's put a gentleman's wager on this, shall we?

I've never touched an HLF annual but the way they're conducting themselves during this whole thing makes me have my reservations. Against my better judgment I'll take you up on that offer. The smell test says to me it's probably not a sustainable business

If we ever run into each other live, loser owes the other a drink. first to 70 vs. 20? How do we determine winner?

Let's go with that. 52 week high is about 73 and that's where it was trending up right before Einhorn first put in his call, and 24 is the low here before the rebound... so 70 vs 20 sounds solid. Let's say the stock has to close above 70 or below 20 for a winner. And if I lose, I'm buying you one of these with a triple shot of something fancy in it: http://3.bp.blogspot.com/-CB-IffQIpZI/TWfricGRiWI/...
herbalife_batido_merengada_proteinas_niuna_dieta_mas1.jpg

Wonderful. That's my normal pre-game drink anyway. How else am I going to hit my daily protein consumption goals on the weekends?

Shit... that statement alone already makes me regret doubting the Herbalife product.

I think I've invented a new market opportunity for them to explore. Protein-infused liquor. They could sell it at establishments on the Jersey Shore as a test market, and expand from there. Maybe call such establishments "Above the Bar" or something more creative to that effect.

Pretty sure Ackman's screwed if this becomes a thing.

Jan 15, 2013
DontMakeMeShortYou:

I think I've invented a new market opportunity for them to explore. Protein-infused liquor. They could sell it at establishments on the Jersey Shore as a test market, and expand from there. Maybe call such establishments "Above the Bar" or something more creative to that effect.

I'm in. Considering how much money is spent on "Vitamin Water" and the like, it's no hard sell to get the same fools to drop an extra buck on 'healthy' booze (I'm going with electrolytes, Brawndo marketing style). After a decade in the bar business, I'm kind of surprised that no one's ever floated this idea, it's brilliant.

Jan 14, 2013
BlackHat:

I think Loeb should get out while he's ahead

Personally, I agree. I have heard unconfirmed reports that this is due to Herbalife using some of their $900mm budget for buying treasury stock...I think today would have been the perfect time for them to buy back some shares and create a rally. But, only time will tell.

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Jan 14, 2013

Yep, I wouldn't be too greedy with this one if I were loeb, then again, what do I know.
One thing I do know though is that taking profits doesn't hurt

    • 1
Jan 14, 2013

ackman presented his "thesis" on HLF so he can mark his 2012 book with the hlf paper gain to offset his massive jcp losses

otherwise his 2012 #s would be a shitshow...looks like that he is just delaying the inevitable shitshow (2013)

go loeb!

Jan 14, 2013

HLF is a pyramid scheme, pure and simple. My question is why isn't anyone discussing the SEC investigation that was launched against HLF a couple of days ago.

"...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

  • Schopenhauer
Jan 14, 2013
seabird:

HLF is a pyramid scheme, pure and simple. My question is why isn't anyone discussing the SEC investigation that was launched against HLF a couple of days ago.

I thought that too but I was informed that the real problem would come from the FTC getting involved

Jan 14, 2013
seabird:

HLF is a pyramid scheme, pure and simple. My question is why isn't anyone discussing the SEC investigation that was launched against HLF a couple of days ago.

After Achman's presentation, I was convinced. However, Herbalife has been around and they have been disclosing their similarities in their financials. One example is the ban they got in Belgium, which was fully reported on their financials from (I think) 2011.

Jan 14, 2013
jmr1991:
seabird:

HLF is a pyramid scheme, pure and simple. My question is why isn't anyone discussing the SEC investigation that was launched against HLF a couple of days ago.

After Achman's presentation, I was convinced. However, Herbalife has been around and they have been disclosing their similarities in their financials. One example is the ban they got in Belgium, which was fully reported on their financials from (I think) 2011.

Because the SEC is unlikely to do more than make them provide more disclosure, which isn't enough of a catalyst to destroy the stock.

Jan 16, 2013
seabird:

HLF is a pyramid scheme, pure and simple. My question is why isn't anyone discussing the SEC investigation that was launched against HLF a couple of days ago.

Did you ever read Einhorn's book about Allied? Shit took years. The government is likely getting kickbacks from HLF.

Jan 14, 2013

That's one awesome start of 2013 if Loeb locks this gain to be honest. He's probably already dumping in the rally going towards the earnings announcement later this month.

Jan 14, 2013

shocked to see the short interest to go up so much the last week. 36% of the float short vs 25% is a very significant difference. Much more ripe for a short squeeze now in my opinion, despite the run up in price.

Jan 14, 2013
Gray Fox:

shocked to see the short interest to go up so much the last week. 36% of the float short vs 25% is a very significant difference. Much more ripe for a short squeeze now in my opinion, despite the run up in price.

Definitely. Ackman was ~80% of the short before and he wasn't going anywhere. Now there's significantly more less sticky capital out there.

Jan 14, 2013

Does anybody know if any of the large holders have pulled their borrow. I'm assuming Third Point has, but any word on Fidelity or the other mutual funds with large stakes?

Jan 15, 2013

Potentially stupid question - can you create a rally with a share repo? AFAIK, you can only buy stock on a zero tick if you're the issuer.

Jan 16, 2013
DaCarez:

Potentially stupid question - can you create a rally with a share repo? AFAIK, you can only buy stock on a zero tick if you're the issuer.

Ask Volkswagen during the whole Porsche debacle.

Jan 16, 2013
BlackHat:
DaCarez:

Potentially stupid question - can you create a rally with a share repo? AFAIK, you can only buy stock on a zero tick if you're the issuer.

Ask Volkswagen during the whole Porsche debacle.

Icahn just joined Loeb's camp.

http://online.wsj.com/article/SB100014241278873234...

Jan 17, 2013
humble_dude:
BlackHat:
DaCarez:

Potentially stupid question - can you create a rally with a share repo? AFAIK, you can only buy stock on a zero tick if you're the issuer.

Ask Volkswagen during the whole Porsche debacle.

Icahn just joined Loeb's camp.

http://online.wsj.com/article/SB100014241278873234...

Icahn hates Ackman...

http://www.nytimes.com/2011/11/27/business/william...

at the end of the day, Icahn is worth 15bn. Herbalife is worth about $5bn. Ackman is worth $1-2bn and runs a $11bn fund. With 37% of the float short and Loeb owning 8% of the business, at the very most 55% of the shares are available to short. Icahn could buy a 30% stake with 10% of his net worth, squeeze the shit out of ackman, and sell off into the short squeeze. I know its not that easy or simplistic in real life, but I bet he could really dick Ackman over with just enough to file on the stock ($250mm).

I think the business is a scam, albeit a very cash flow positive scam, that doesn't fail unless the government acts, and even though its a scummy business ackman loses via the sharks rather than the merits of herbalife.

Jan 17, 2013
Gray Fox:

at the end of the day, Icahn is worth 15bn. Herbalife is worth about $5bn. Ackman is worth $1-2bn and runs a $11bn fund. With 37% of the float short and Loeb owning 8% of the business, at the very most 55% of the shares are available to short. Icahn could buy a 30% stake with 10% of his net worth, squeeze the shit out of ackman, and sell off into the short squeeze. I know its not that easy or simplistic in real life, but I bet he could really dick Ackman over with just enough to file on the stock ($250mm).

I think the business is a scam, albeit a very cash flow positive scam, that doesn't fail unless the government acts, and even though its a scummy business ackman loses via the sharks rather than the merits of herbalife.

This is perfectly accurate. I think it's a far way off until the base of the pyramid actually implodes, and it won't do so without government intervention (at the very least a legitimate investigation). I challenge anyone to support that the business isn't actually a pyramid scheme, but at the end of the day it's not a pyramid scheme until it gets reported as being such by the FTC or whoever. Long-term viable business? Absolutely not. Would I want to be short right now? Absolutely not. Would I want to be long though? Absolutely not.

Jan 17, 2013
BlackHat:
Gray Fox:

at the end of the day, Icahn is worth 15bn. Herbalife is worth about $5bn. Ackman is worth $1-2bn and runs a $11bn fund. With 37% of the float short and Loeb owning 8% of the business, at the very most 55% of the shares are available to short. Icahn could buy a 30% stake with 10% of his net worth, squeeze the shit out of ackman, and sell off into the short squeeze. I know its not that easy or simplistic in real life, but I bet he could really dick Ackman over with just enough to file on the stock ($250mm).

I think the business is a scam, albeit a very cash flow positive scam, that doesn't fail unless the government acts, and even though its a scummy business ackman loses via the sharks rather than the merits of herbalife.

This is perfectly accurate. I think it's a far way off until the base of the pyramid actually implodes, and it won't do so without government intervention (at the very least a legitimate investigation). I challenge anyone to support that the business isn't actually a pyramid scheme, but at the end of the day it's not a pyramid scheme until it gets reported as being such by the FTC or whoever. Long-term viable business? Absolutely not. Would I want to be short right now? Absolutely not. Would I want to be long though? Absolutely not.

Again, isn't this eerily similar to Einhorn's battle w/Allied Capital? Allied's scheme continued until the credit markets tightened and the government government came in and put pressure on BLX's preferred lender status.

I think the fall is a long ways out, but it will be drastic and quick.

Jan 16, 2013

Wow. This just got real interesting. Who's next...?

Jan 17, 2013

so this is how activist investing works in the social media era

Jan 17, 2013

DontMakeMeShortYou, interested to see if you would be long here. Blackhat, understand your position and agree entirely. Best to just stay away from this whole mess.

Jan 18, 2013
blackthorne:

DontMakeMeShortYou, interested to see if you would be long here. Blackhat, understand your position and agree entirely. Best to just stay away from this whole mess.

It's more of a PA trade for me. I'm comfortable taking a loss, but not comfortable taking career risk. One of the big short catalysts for the for-profit education names was an ABC report looking into problems in the industry. I can't be sure that some reporter won't do the same to HLF... and if that happens, I'm convinced that there would be a meaningfully negative consumer reaction. I don't want to be there if/when that happens.

Jan 18, 2013
DontMakeMeShortYou:
blackthorne:

DontMakeMeShortYou, interested to see if you would be long here. Blackhat, understand your position and agree entirely. Best to just stay away from this whole mess.

It's more of a PA trade for me. I'm comfortable taking a loss, but not comfortable taking career risk. One of the big short catalysts for the for-profit education names was an ABC report looking into problems in the industry. I can't be sure that some reporter won't do the same to HLF... and if that happens, I'm convinced that there would be a meaningfully negative consumer reaction. I don't want to be there if/when that happens.

This is exactly what I was going to point out.

I'm still more concerned about the setup being structurally unsound than waiting on regulators. A negative press catalyst could have serious effects on the MLM structure.

Jan 18, 2013
DontMakeMeShortYou:
blackthorne:

DontMakeMeShortYou, interested to see if you would be long here. Blackhat, understand your position and agree entirely. Best to just stay away from this whole mess.

It's more of a PA trade for me. I'm comfortable taking a loss, but not comfortable taking career risk. One of the big short catalysts for the for-profit education names was an ABC report looking into problems in the industry. I can't be sure that some reporter won't do the same to HLF... and if that happens, I'm convinced that there would be a meaningfully negative consumer reaction. I don't want to be there if/when that happens.

Love this point because it's something plenty of analysts I talk to bring up but nobody really acknowledges publicly. There's so many times when I come across something I'd put plenty of my own money in and be completely comfortable losing 50K on privately, but would never recommend professionally because of the career risk. Might sound sad but I'd rather lose 100K privately than 10K publicly. I've put some very stupid trades on in my PA during my career.

By the way, I'm having a hard time imagining we couldn't get in touch with a reporter at a big network and influence that sort of thing. Wonder what the legal ramifications of that are. Sometimes I wish I worked at an actual, loud activist fund...

Jan 17, 2013

Disclaimer, I don't like HLF, I'm not sticking up for them. I tried MLM for about a week and realized it was definitely not for me. Just like drugs...some people like 'em, I'm just not a fan.

That having been said:

I keep seeing people call this a pyramid scheme, and I don't think the people saying that understand exactly what they're looking at. In a pyramid scheme, the profits are paid for recruitment, as in: you are paid to recruit people. In MLM, you are paid to sell product, and if you want to recruit other salespersons/distributors then you collect an override. The overrides can be huge and are paid several generations deep, so the financial possibilities are enormous. It's not unlike a trading desk hiring a new guy and collecting a portion of their profit. Also, very few people in HLF are dedicated salespeople, most sign as customers and that's it.

Even though anyone literally can start with nothing and become rich, I don't like these companies because (1) they sell people on the idea that it's easy to make money with them [it's not] and (2) their products usually aren't any different than stuff you can buy more cheaply in retail. So, I'm not a fan of their dynamic. But that doesn't make them a pyramid, and I expect Ackman to get his ass handed to him when the SEC concludes that there's nothing wrong and the FTC decides to go for lower hanging fruit. (Hint: AmWay)

HLF could be run better and I think Icahn is going to kill multiple birds with one stone: (A) stick it to Ackman (B) make some easy money, and (C) make inroads into pressueing HLF's management to upgrade their practices and products in order to stay relevant...and make yet more money in that process.

Jan 17, 2013

UFO-at what point does MLM become a pyramid scheme then? Because it seems like with Herbalife, the top is weighted with recruiters, and the bottom sellers.

I would assume the reverse would be a pyramid scheme. What Herbalife is running now is just taking advantage of stupid people, but not structurally unsound.

Jan 17, 2013
blackthorne:

UFO-at what point does MLM become a pyramid scheme then? Because it seems like with Herbalife, the top is weighted with recruiters, and the bottom sellers.

I would assume the reverse would be a pyramid scheme. What Herbalife is running now is just taking advantage of stupid people, but not structurally unsound.

The strict definition of a pyramid scheme is an MLM in which a participants' earnings are derived "primarily from" recruiting as opposed to the actual selling of the product to retail customers. I'm assuming this means a *majority* come from recruiting incentives rather than retail profits. There's a good number of questionable tactics HLF has employed to lump certain incentive-based costs into the wrong areas to make it look like more of the payouts to distributors are coming from "retail profits" (i.e. selling the actual product and capturing the margin). I'm sure all the MLMs do this, but if you can get away with it because there's gray area, then you can get away with it.

Jan 18, 2013
Jan 20, 2013