Trading as high as $73.00 in April of 2012, the stock price plummeted after David Einhorn, successfully bet against Herbalife Ltd. (NYSE:HLF) for his hedge-fund firm, Greenlight Capital, and then participated in the earnings call on May 1, 2012 that sent the stock plunging within minutes, and closed down 20% that day. Bill Ackman, CEO of Pershing Square Capital Management, also held a short position in Herbalife and went public in December giving a three hour presentation proposing that Herbalife Ltd. (NYSE:HLF)’s multi-level marketing program was an illegal pyramid scheme. With Ackman short 20 Million shares, the stock closed on Christmas Eve at $26.06.
Yet all hedge-fund managers didn’t see it this way as Dan Loeb of Third Point took an 8% Stake in Herbalife in early January, and Carl Icahn verbally battled with Ackman on CNBC in December, and since, revealed a stake in Herbalife, which he recently increased to 15.55% of the shares outstanding. The bigger stake makes Icahn the company’s largest shareholder, passing Fidelity, which held 13.9%. Icahn also came to an agreement with Herbalife Ltd. (NYSE:HLF) that adds two of his appointees to the board and allows him to purchase up to 25% of the company.
With the stock jumping to above $40.00 on the news of Icahn’s increased holdings and the SEC investigating whether or not there is a pyramid scheme in play, there is a risk that Ackman’s thesis is proved true, and the stock drops to lower levels — after all, in December 2011 a Belgium Court ruled that Herbalife has established a pyramid scheme, and the court ordered cessation of Herbalife pyramid scheme; however, this isn’t Belgium, and I see a much greater probability of Herbalife Ltd. (NYSE:HLF) continuing to grow its business domestically and globally, as it overcomes the attacks of Bill Ackman.
Ackman has other big investments to worry about also, as his stake in J.C. Penney Company, Inc. (NYSE:JCP) isn’t doing so well after J.C. Penney reported losses of nearly one billion dollars for the fiscal year that recently ended. After that report, J.C. Penney fell from over $22 to under $15 and is stuck in a range between $14.50 and $15.80 currently, but it could pop or drop at any time as J.C. Penney is one of the highest shorted stocks in the market right now, with 44.8% of float shorted. For this reason, J.C. Penney is nothing but a gamble right now with risk out weighting return. I believe that we will see J.C. Penney drop further and rebound later, but with the large number of shorts in this stock on one end, and Bill Ackman behind the company on the other end, the shorts could get squeezed before we see a further drop, so I say stay away for now.
Herbalife on the other hand, has overcome some major setbacks in the past, including:
The 1985 Congressional Hearings on weight-reduction programs, where Senator William V. Roth, Jr. (R-DE) grilled the company founder Mark Hughes about the “research and testing” done prior to marketing Herbalife’s products.
The 1986 Permanent Injunction against Herbalife Ltd. (NYSE:HLF) from a CA court that stops the company from making certain product claims and requires it to maintain certain standards within its marketing program to set it apart from a pyramid scheme.
The 1998 cardiac arrest suffered by a 28-year-old woman that the Food and Drug Administration attributed to a Herbalife ephedrine product, Original Green.
The 2000 death of founder Mark Hughes at age 44 from a mixture of Drugs and Alcohol.
Yet the company continues to grow markets, revenues, distributors, and income. I was concerned that their growth might be coming only from opening new markets, however as reported in their most recent 10K filing, all regions are growing revenues including North America.
Given past decisions of the FTC and their reliance on the decision made in the Amway case in 1979, declaring Amway a legit multi-level marketer and not a pyramid scheme, whereas in Amway, salespeople received compensation for products they purchased and sold to other distributors and other consumers, just like at Herbalife Ltd. (NYSE:HLF), I can’t imagine the company being shut down as an illegal pyramid scheme in the U.S.
At the current stock price, the company is trading at a modest 9.5 P/E Ratio, and a .58 PEG Ratio, with a dividend yield of 3.1%. Additionally, on July 30, 2012, the board of directors authorized a new $1 Billion share repurchase program that will expire on June 30, 2017. Given the continued earnings growth, this share repurchase program, and Carl Icahn’s influence and history of bringing value out of companies, Herbalife only needs to get back to $55 for a return of more than 30% which is much less than its high of $73 last year.
The article Why You Should Buy Herbalife originally appeared on Fool.com and is written by Anthony Mitchell.
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