As one of the most highly publicized hedge fund managers around, just about everyone here knows about Ackman and his fight against Herbalife, in which he took a short position worth about $1 billion against the company he accuses of fraud. In addition to the lawyers and lobbyists Pershing Square has hired to further their cause, they even made this pretty informative site. Not to be outdone, Herbalife fought back with investigations of their own, insisting that Ackman was intentionally manipulating the company's stock. If that was/is the case, it seems that Ackman may have missed out on his opportunity to cash out.
Herbalife’s stock price dropped more than 40%, to about $26 a share, when Mr. Ackman disclosed his position in December 2012. On Friday, the stock closed at $46.21, up 2.1% on the day. Through ups and downs, the stock, including dividends, is above Pershing Square’s average cost, putting the bet underwater, the fund has said.
However, despite the efforts from both sides, investigations by the U.S. attorney's office and the FBI have reached a standstill. That may be seen as a big "W" for Herbalife- if the millions of dollars spent by Pershing Square failed to create any case against HLF, then what will? Personally, I'm not a big supporter of MLM companies, especially ones (all of them?) that peddle crappy products. Selling garbage goods isn't worthy of legal recourse though, so is this going to go down as a big red mark on Ackman's record? Or will those supporters of Herbalife-- which include the likes of Soros and Icahn-- be wishing they jumped the fence before it all goes belly up?
Nick Naylor I've been following HLF and Bill Ackman since the famous fight broke out on CNBC and the subsequent "reunion" at the CNBC conference.
In any case its interesting to see a company that was on the brink of failure after the death of its founder and being taken private, come roaring back and with so much attention it has garnered it continues to climb back after every major (or minor) investigation, lawsuit, etc.
I don't believe Herbalife is a pyramid scheme...just another shady organization like Amway, Avon, AdvoCare, etc that continues to sell idiots the American Dream in that buying their overpriced products, marking it up, and selling to other idiots can help them earn the big bucks.
I sound cynical because I am but so long as people continue buying into this "Dream" Herbalife will continue to rake in the earnings. It would take a massive overhaul of businesses such as Herbalife and reclassification of independent contractors (like Uber) for Herbalife to begin struggling.
Either that or people wise up and realize the bullshit they've been fed.
I'm also curious as to what would have happened had Soros and Ichan NOT backed Herbalife and how much their influence or lack thereof affected the stock price.
Yeah they're a scam imo. I think their snake oil salesman tactics are ridiculous.
That's exactly how I feel about the whole situation-- a business that purposefully preys on the naivete and ignorance of a floundering lower class is an "ethically bad" one, but not an illegal one... Which is one of the reasons I am surprised Ackman took such a position in this short. The topic of his hubris comes up frequently in other threads on this forum that share the same topic, and I think that precisely explains why he would generate a position that necessitates government regulation. Is there truly some form of accounting fraud going on within the company? Who knows-- and it has yet to be proven by Ackman and his millions of dollars worth of research, so that end is looking somewhat bleak for him.
I don't know what else can be said against MLM companies. When you break it down (which is a fairly simple thing to do) you easily see that your time would be better spent behind the counter at McDonald's than hocking these garbage products, yet the idea of the American Dream (and perhaps something else) keeps those on the bottom of the totem pole spinning their wheels ad infinitum.
Great post (SB awarded). I firmly believe Herbalife is a textbook example of a stock that trades not on fundamentals but simply because of the media exposure it has received and the fact that you have two hedge fund heavyweights in strong favor of the stock.
I wonder if Ichan or Soros would still invest in HLF had it not been for Ackman's hubris and proclamation? It also makes me wonder how and why HLF is wildly successful versus other MLMs such as NuSkin?
As an investor do you now have to place a value on stupidity of the common masses when attempting to find the fair market value of a stock such as HLF?
My cousin was affiliated with one of those MLM companies called Forever Living, he was recruited in college, his mentor showed him a (probably fake) fat cheque, my cousin stupid enough got involved and lost all his money and his friends. bottom line in my view all of MLMs are a fraud
MLM's are all full of shit. HLF, NuSkin, Avon--they shift their inventory to their independent distributors, and most distributors can't move any (or very little) product. The wealthy distributors are the ones that joined early and get a cut of whatever sales their "downlines" make. It's classic pyramid.
oulixeus isn't a Pyramid Scheme one where you're being asked to recruit others and pay fee(s) rather than buy and sell products as a distributor or independent contractor?
An example that fits into the above is Ambit Energy where a guy I knew from class tried to recruit me in. His "handler" for a lack of a better word, told me my job was to help "build a team" and recruit others. I did some research (Google) and found that recruitment is the primary driver of their business and not selling electricity services.
Herbalife is pure trash IMO but they have a slightly different business model which flirts with but is not a Pyramid Scheme IMO as they are selling actual products and not asking, to my knowledge members to recruit others beyond getting them to buy and sell products.
@RedRage yes, you are technically correct. That's how they get away with it. But if you look closely at these "MLM"s (source--I worked for one in their customer service center when I was in college), recruiting new distributors is KEY to making money. For example, let's say I join as a distributor and buy product. In addition to selling products, I sign up distributors under me (thus joining my "downline"). Every time this downline sells a product, I get a % cut. So what do you think is more valuable--selling shitty product, or getting a shitload of downlines to sell FOR me and reap the commissions? Is it technically illegal? Probably not. But it's shady as fuck. I spent my time in the call center talking to people that definitely can't afford these products thinking they are going to get rich. They only people getting rich are the executives and the people that have a huge downline, and I'm talking MILLIONS of dollars per year.
Anyone with basic knowledge of business can see how Herbalife is a fraudulent company. You can argue its business practices are not outright illegal, but they are highly unethical at best. It absolutely is a pyramid scheme that feeds off the bottom. Herbalife's product has nothing to do with their business even, they can replace supplements with any type of widget and business would not change for them.
Our kids will be reading about MLM firms in their business fraud classes. I find it astounding that they are even still in operation, let alone achieving the success they are currently achieving.
Everyone arguing that HLF and all MLM are definitely a scam needs to do some more research. Being fraudulent is about more than being 'shady' or misleading - particularly w.r.t. MLMs, there is a lot of established case law which suggests that HLF is not, in fact, legally fraudulent.
Would be surprised if Ackman wins this one - just interested in seeing how he folds (he has to fold at some point, right)?
Everyone arguing that HLF and all MLM are definitely a scam needs to do some more research. Being fraudulent is about more than being 'shady' or misleading - particularly w.r.t. MLMs, there is a lot of established case law which suggests that HLF is not, in fact, legally fraudulent.
Would be surprised if Ackman wins this one - just interested in seeing how he folds (he has to fold at some point, right)?
Coincidentally I believe Ackman is releasing (yet another) video on HLF tomorrow. How that is recieved will be a good indicator of whether Ackman's case has any real legs or not. At this point, given the time elapsed with no concrete moves by regulators, I would think the pressure in more on Ackman than HLF
What do you guys think about Bill Ackman's opinion on Herbalife? Is it really a pyramid scheme? (Originally Posted: 12/22/2012)
This is as fascinating and exciting as it gets. Hedge Fund Manager tears down alleged pyramid scheme of a company, Herbalife, down 19% in one day. Herbalife CEO says the "US will be a better place without Bill Ackman."
I'm thinking about taking a position, but I'm not sure which side. Hold your laughter.
The case for shorting:
Bill Ackman is an amazing investor, extremely smart guy, and his fund has tremendous returns. If Michael Jordan was telling you how to play basketball, you'd probably listen.
I've never seen anyone have such aggressive and strong conviction in placing any bet. Ever.
Taken from a Bloomberg interview, "I believe that it is a certainty that this company is a pyramid scheme, and I would not say that if I did not believe that to 100% confidence level because I understand the implications of saying a company is a pyramid scheme if it is not a pyramid scheme."
When asked about this short compared to his previous shorts and investments, he responded "this is the highest conviction I ever had about any investment I have ever made." Quite a statement.
He has a target price of $0 and believes the company is going to fail.
The case against shorting:
I know how most of these MLM companies work, and I believe that they are not "pyramid schemes." Every feature about these companies are indicative of it being one, but it is not "technically" one.
First off, pyramid schemes are a illegal form of business in the United States. What Investment Bank would bring a company that is a pyramid scheme to the market? If it really was a pyramid scheme, it wouldn't have gotten it's IPO, and would not even be allowed to operate in the first place even as a private company.
In simpler terms, pyramid schemes are illegal, if the company is allowed to operate, then it is not a pyramid scheme.
For over 32 years it was not labeled a pyramid scheme, nothing about the business model has changed, why is it all of a sudden a pyramid scheme?
My best guess is that Ackman is trying to get the FTC and other courts to redefine the meaning of a pyramid scheme. I think the definition now is too technical, and may later change to consist of a broader range of activities that will constitute what a pyramid scheme is.
Inductive reasoning states that "If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck." I believe the courts will use a similar approach if Ackman is right.
There are lots of other companies that are just like Herbalife. If Ackman is taking down Herbalife, is he not also taking down companies like Amway and other similar companies?
Interesting facts, the top 1% of the company earn 88% of income. Herbalife CEO Michael Johnson was the highest paid executive in recent years.
Basically, the only reason why I am hesitant to take a position is because of the interpretation of the law relating to pyramid schemes.
About time someone called Herbalife out.
Take a look at the presentation. There are several features specific to Herbalife (differentiating from other MLM companies) which are highlighted in the presentation and which Ackman obviously feels put Herbalife across the line in pyramid scheme territory. He said specifically in the CNBC interview that he felt there were a number of legitimate MLM companies but that Herbalife was not one of them. http://www.businessinsider.com/bill-ackmans-herbalife-presentation-2012…
[quote=Mike McDermott]Take a look at the presentation. There are several features specific to Herbalife (differentiating from other MLM companies) which are highlighted in the presentation and which Ackman obviously feels put Herbalife across the line in pyramid scheme territory. He said specifically in the CNBC interview that he felt there were a number of legitimate MLM companies but that Herbalife was not one of them. http://www.businessinsider.com/bill-ackmans-herbalife-presentation-2012…]
Ahhh, must have missed that part. Makes sense.
[quote=Mike McDermott]Take a look at the presentation. There are several features specific to Herbalife (differentiating from other MLM companies) which are highlighted in the presentation and which Ackman obviously feels put Herbalife across the line in pyramid scheme territory. He said specifically in the CNBC interview that he felt there were a number of legitimate MLM companies but that Herbalife was not one of them. http://www.businessinsider.com/bill-ackmans-herbalife-presentation-2012…]
Ahhh, must have missed that part. Makes sense.
Icahn Takes Herbalife Stake (Originally Posted: 01/16/2013)
Are Ackman and shortsellers screwed?
Dan Loeb + Icahn = pretty deadly combo.
If Ackman loses his $ its not bad enough that he lost his $/investors $, its even worse that he did ALL this technical analysis and presentations trying to prove his thesis. So if he loses, no one will trust anything he does anymore since he did all the due diligence anyone could have done and still decided to short lol
Thoughts?
John Meriwether much? The investment management industry is shockingly forgiving.
The short squeeze is here for Ackman and the shorts.
Who's to say Ackman didn't cover his short as soon as Loeb announced his stake?
Herbalife, Long or Short? (Originally Posted: 01/07/2013)
If everyone in the world is convinced by Bill Ackman's 342 page HLF presentation, then the stock would probably be trading at $0 right now, except it isn't. Nonetheless, the short announcement did trigger an impressive 4 day selloff, causing HLF share to tumble from low $40s to as low as $24.24. But since then, the stock has bounced back 50%, and anyone who jumped on the bandwagon after December 19 is already in the red.
What caught my attention is this post titled "Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid". It was written by Robert Chapman of Chapman Capital, who openly challenged Ackman's short position. According to the post, Chapman has been buying when the selloff was going on, and he believes that:
And that:
Chapman went on and argued for the lack of regulatory risk to HLF shares. He also commented on Ackman's motive and timing for the high-profile short announcement.
So, it's Ackman vs. Chapman. Who do you think will be the last one standing?
By the way, I hope anyone here who shorted HLF after the announcement got out in time.
Herbalife is a pyramid scheme. I hope to god it gets some sort of regulatory consequences, or the justice system will have allowed this company to profit off of deceit... and grow to profit off of deceiving increasingly lower income people who are attracted to the prospects of riches that Herbalife promises.
Sadly, there will always be suckers chasing the easy money dream.
I have to believe Amway would be closer to the top of the FTC's list than Herbalife. But they'll never do anything about either scam.
Chapman on top missionary style
The timing of his presentation is more of interest to me. JCP has done very poorly this year and makes up 10% of his portfolio from filings. Although this short won't offset his JCP losses, it will at least raise his PR pnts up.
This guy runs a hedge fund that holds 35% of its assets in HLF? Even if it wasn't a scam... dude should be crucified.
A tad overweight, no? lol
I took a brief long position after the bloodbath as simply a reversion play. One of the easiest ways to make a quick buck imo, did the same thing with FB calls a couple months back. Not the kind of stock I'd ever mess with otherwise though.
I find it hilarious that this whole thing came out of an attempt to ride Einhorn's coattails, and then he had to do the work himself once he realized Dave had concluded that playing hold'em would be more fun.
and can't wait for the call and the ceo to go all hulk mad
Got to admit tho, this is really entertaining stuff. Herbalife got their rebuttal presentation in 3 days I believe, going to be waiting for that one.
Ackman said he would donate his own proceeds to charity, not his fund's.
I'm rooting for the shorts. Ackman's assertions are right, but as for the stock hitting zero, that's anyone's guess. MLMs are the bane to society. I've seen a lot of friends lose a lot of money/time to Amway, MonaVie etc. I used to work in sales, and I know incredibly manipulative, deceptive and opportunistic these types of companies are. I had a friend who told me she'd retire by 25. Last time I checked, she's living at home barely scraping by. Not to mention many other financial services firms that recruit anyone to sell insurance, funds etc. on commission
Shit got interesting today with Dan Loeb disclosing they own 8% of the stock now.
And to top it off: SEC opened investigation.
Icahn just went long...
Holy hell, this is going to be a bloodbath.
Seriously, Einhorn is the fucking man, he asks a question a few months ago on an observation, and it's like a celebrity deathmatch now
Ackman Shorting Herbalife (Originally Posted: 12/19/2012)
It's always worth listening when Ackman does something. It's really interesting given the HLF/Einhorn call in May.
http://www.businessinsider.com/cnbc-bill-ackman-is-short-herbalife-and-…
nice catch - don't think einhorn ever disclosed he was short hlf, but may very well be after that conference call earlier this year.
i do hope that this is not a desperate attempt to generate returns after jcp. even if hlf/mlm schemes are terrible for most of its customers, they are selling a dream (financial independence etc.), and just from their earnings/cashflows there are plenty of willing addicts (yes, a drug reference).
So whats the rule about these star hf managers disclosing positions publicly and starting self-fulfilling prophecy. Do they have to wait 1 week, 1 month, 1 day before they can change positions?
Whats the rule about HF managers disclosing positions in the most loud, blatantly obvious way two days before options expire (read puts) and a week before year end performance has to be calculated???
I don't think there is a rule and what he did was perfectly legal, but the whole thing smells.
Anyone want to speculate on why disclose now? Ackman hinted on a short he was building back in his Q1 '12 investor letter but did not disclose until now.
Herbalife Update (Originally Posted: 02/28/2013)
http://www.businessinsider.com/herbalife-halted-news-pending-2013-2
Icahn getting 2 board seats, allowed to acquire up to 25%. Is this Ackman's downfall?
if its a scam, it will still be a scam.
that's a significant if though
I agree, and that seems to be Ackman's motto. I would just be worried if I had an opposing party with Icahn's credentials not only disagreeing with me but also putting his money where his mouth is.
Not even really a matter of "if" more of "when". Ichan could bleed Ackman dry in the short-run and be wrong long-run he has done it many times before.
I wonder what Ackman's redemption policy is because with two major public calls like that on stocks that can easily be squeezed or manipulated he could be in trouble. Well the bigger issue is that he is underwater on JCP quite a bit and not sure on HLF status of where he is short from. If he has to unload either due to redemptions it will be hard for him to exit.
God let's hope so. Word would get out very quickly and everyone on the street would front run his unwinds. Would be an epic fail still being talked about 10 years from now.
Neither are huge positions of his. See CP and PG, which have done well.
This thing is going private
Icahn is nervous and desperate.
Icahn isn't desperate - he's got more than enough money. As I see it, he's in this purely to squeeze out Ackman. The guy's an old-school New York Jew (and I absolutely mean that in the most endearing way); Icahn's got beef with Ackman, no way he's ever going to drop it, or let Ackman live it down.
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