Billionaire Carl Icahn Buying More Herbalife

Carl Icahn has bought an additional 2.3 million shares of Herbalife Ltd. (NYSE:HLF) since March 5^th, bringing the total number of shares in his portfolio as of the most recent SEC filing to 16.4 million (research more stocks Icahn likes). Icahn famously challenged public Herbalife short (and fellow billionaire) Bill Ackman on CNBC earlier this year before revealing his own stake in the company. Ackman had given a presentation in December arguing that Herbalife is a pyramid scheme and that the shares would go to zero; his Pershing Square held a large short position in the stock at the time (see Pershing Square’s latest long picks). That presentation brought the stock price from above $40 down to $26 before fully recovering in mid January, dropping to $35 in early February, and then rising a bit back to around $40 again. Icahn has announced that he plans to explore a number of strategic options with Herbalife management, including a takeover.

If Herbalife Ltd. is a pyramid scheme, Ackman argued, then over time distributors will leave the business forcing the company to continually find new markets (he mocked Herbalife for expanding its business- known for weight loss products, though it does also provide nutritional and supplemental products- into Ghana). In addition, the U.S. and other governments might shut down the company within their borders. The bullish case has been that the stock currently trades at 10 times trailing earnings, or value levels; that revenue and earnings have been growing, rising at double-digit rates last quarter compared to the fourth quarter of 2011; and that even the U.S. is not a particularly large market limiting the downside from any shutdowns. Icahn has offered the prospect of a buyout but we are skeptical that lenders would finance a deal as long as there is any chance of the pyramid scheme thesis playing out.

Short sellers are not required to register their positions with the SEC, but we can see some other big names who have reported being long the stock. In January billionaire Dan Loeb’s Third Point had reported a position of 8.9 million shares in Herbalife Ltd. , or 8.2% of the total shares outstanding, before Icahn entered the picture (find Loeb’s favorite stocks). This was after not owning any shares at the beginning of October. Ken Heebner’s Capital Growth Management had owned shares in Q3 and increased its stake by 41% during the fourth quarter of 2012 to a total of 3.3 million shares (check out more stocks Heebner was buying).

Herbalife is something of a unique situation but we can compare it to other companies in a similar business or with a similar “multi-level marketing” business model. Nu Skin Enterprises, Inc. (NYSE:NUS) and Avon Products, Inc. (NYSE:AVP) are more focused on beauty products. Avon trades at 16 times consensus earnings for 2014, and revenue has been declining slightly; there’s fairly low short interest in the stock. Nu Skin had revenue and net income growth close to 20% in the fourth quarter of 2012 versus a year earlier, but the stock is down 27% in the last year and 20% of the outstanding shares are held short. It currently carries a trailing P/E of 12, a slight premium to Herbalife though its growth story has been better.

NutriSystem Inc. (NASDAQ:NTRI) has been struggling with profitability, and though Wall Street analysts project somewhat stable earnings next year sales have been falling and we would avoid the stock. Weight Watchers International, Inc. (NYSE:WTW) has fallen 50% in the last year, and it is now valued at 10 times earnings on both a trailing and a forward basis. That is a cheap multiple, and even though financial performance has been mixed we’d note that places the company at about the same pricing as Herbalife. As a result it may be of more interest to investors who haven’t been persuaded by Ackman but do have concerns about the longer-term viability of that company.

Disclosure: I own no shares of any stocks mentioned in this article.