Herbalife Ltd. (HLF): Were These Investors Wrong?

Herbalife Ltd. (NYSE:HLF) was in 31 hedge funds’ portfolio at the end of the fourth quarter of 2012. HLF has seen an increase in support from the world’s most elite money managers lately. There were 23 hedge funds in our database with HLF holdings at the end of the previous quarter. However, today in the morning, D.A. Davidson announced about  degrading Herbalife.

In the eyes of most traders, hedge funds are viewed as slow, outdated financial vehicles of yesteryear. While there are over 8000 funds trading at the moment, we at Insider Monkey look at the crème de la crème of this club, about 450 funds. It is widely believed that this group has its hands on the lion’s share of the hedge fund industry’s total asset base, and by tracking their top equity investments, we have come up with a number of investment strategies that have historically outperformed the broader indices. Our small-cap hedge fund strategy outperformed the S&P 500 index by 18 percentage points per year for a decade in our back tests, and since we’ve began to sharing our picks with our subscribers at the end of August 2012, we have trumped the S&P 500 index by 24 percentage points in 7 months (check out a sample of our picks).

Equally as key, bullish insider trading activity is another way to parse down the investments you’re interested in. There are a variety of motivations for an upper level exec to cut shares of his or her company, but just one, very obvious reason why they would behave bullishly. Many academic studies have demonstrated the useful potential of this tactic if investors know where to look (learn more here).

Consequently, let’s take a gander at the latest action encompassing Herbalife Ltd. (NYSE:HLF).

What does the smart money think about Herbalife Ltd. (NYSE:HLF)?

At year’s end, a total of 31 of the hedge funds we track held long positions in this stock, a change of 35% from the previous quarter. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings meaningfully.

Of the funds we track, Ken Heebner’s Capital Growth Management had the biggest position in Herbalife Ltd. (NYSE:HLF), worth close to $110.2 million, accounting for 2.9% of its total 13F portfolio. Coming in second is Dan Loeb of Third Point, with a $102.1 million position; 1.9% of its 13F portfolio is allocated to the stock. Other peers with similar optimism include Steven Richman’s East Side Capital (RR Partners), and Patrick McCormack’s Tiger Consumer Management.

As one would reasonably expect, key money managers have jumped into Herbalife Ltd. (NYSE:HLF) headfirst. Third Point, managed by Dan Loeb, initiated the biggest position in Herbalife Ltd. (NYSE:HLF). Third Point had 102.1 million invested in the company at the end of the quarter. Stephen Mandel’s Lone Pine Capital also initiated a $76.8 million position during the quarter. The following funds were also among the new HLF investors: D. E. Shaw’s D E Shaw, Kenneth Mario Garschina’s Mason Capital Management, and Philippe Laffont’s Coatue Management.

How are insiders trading Herbalife Ltd. (NYSE:HLF)?

Bullish insider trading is at its handiest when the primary stock in question has experienced transactions within the past half-year. Over the latest half-year time period, Herbalife Ltd. (NYSE:HLF) has seen 2 unique insiders purchasing, and 3 insider sales (see the details of insider trades here).

Let’s also review hedge fund and insider activity in other stocks similar to Herbalife Ltd. (NYSE:HLF). These stocks are Lifevantage Corporation (NASDAQ:LFVN), USANA Health Sciences, Inc. (NYSE:USNA), Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL), Prestige Brands Holdings, Inc. (NYSE:PBH), and Perrigo Company (NASDAQ:PRGO). This group of stocks are in the drug related products industry and their market caps resemble HLF’s market cap.