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Herbalife (HLF) has seen itself run back up to it's pre-Bill Ackman short levels of just over $40/share in the last couple of weeks. The company has had some support behind it, between the company vigorously defending itself against accusations of being a pyramid scheme and billionaire Carl Ichan coming out and publicly taking a long position in the company and then backing it.

After doing some investigating over the last few days, I've found four serious reasons that I am short Herbalife, both short-term and long.


(Click to enlarge)

1. It is obvious Carl Ichan is either out of the Herbalife game, or no longer confident in his long position.

Ichan did not sound confident at all in a long position in Herbalife during Friday's CNBC Hedge Fund smackdown 2013 sponsored by the World Wrestling Federation and brought to you by Fast Money. Ichan was constantly asked about Herbalife by both the host and Bill Ackman, and he seemed to continually dodge the question.

The CNBC.com transcript between CNBC host Wapner and Carl Ichan looks like this :

WAPNER: LET'S MAKE GOOD USE OF IT OR BETTER USE OF IT THEN. CARL, WHY DON'T YOU JUST COME CLEAN ON THE HERBALIFE THING? ARE YOU LONG OR NOT? THE WHOLE MARKET KNOWS OR SUSPECTS YOU ARE.

ICAHN: HEY LISTEN, I DIDN'T GET ON TO BE BULLIED BY YOU. IF I CAN TALK, LET ME TALK. BUT I DON'T NEED YOU TO -- HELLO?

WAPNER: YEAH, I'M HERE. NO ONE'S BULLYING YOU, CARL. I MEAN, YOU'RE THE ONE WHO CALLED IN TO OUR SHOW TO TALK TO BILL ACKMAN. AND THE PRINCIPLE ISSUE IS THE HERBALIFE THING.

ICAHN: NO, NO. LISTEN TO ME. I WAS CALLED IN BY MAX MEYERS TO HAVE A CONVERSATION, NOT TO ARGUE WITH YOU. IF YOU WANT TO TAKE -- HELLO?

WAPNER: YEAH, WE'RE LISTENING.

ICAHN: IF YOU'RE LISTENING, LET ME TALK. YOU KNOW, I WANT TO SAY WHAT I WANT TO SAY. AND I'M NOT GOING TO TALK ABOUT MY HERBALIFE POSITION BECAUSE YOU WANT TO BULLY ME.

WAPNER: I'M NOT BULLYING YOU. I'M ASKING THE QUESTION EVERYBODY WANTS TO KNOW, CARL THAT'S ALL. BUT YOU CAN MAKE YOUR STATEMENT.

ICAHN: I'M GOING TO TALK ABOUT WHAT I WANT TO TALK ABOUT.

WAPNER: OKAY.

ICAHN: IF YOU WANT TO TAKE THAT POSITION I WILL NEVER GO ON CNBC, YOU KNOW. YOU CAN SAY WHAT THE HELL YOU WANT.

WAPNER: OKAY.

ICAHN: BUT I'M GOING TO TELL YOU, I'M GOING TO TALK ABOUT WHAT ACKMAN JUST SAID ABOUT ME, NOT ABOUT HERBALIFE. AND I'LL TALK ABOUT HERBALIFE WHEN I GOD DAMN WANT TO, NOT WHEN YOU ASK ME.

Instead of offering up confidence in his long position, he never even admitted to still having a long position in the company. As Ackman pointed out, he could have bought on Ackman's bear raid, rode HLF to $45 and sold off.

What part of "I'll talk about Herbalife when I god damn want to" screams long term confidence from the Ichan camp?

Ichan instead ominously alludes to the potential that HLF could be the "mother of all short squeezes", which is extremely unlikely if Ichan is already out of the game. With Ichan out of the way, Ackman and his followers are free to continue publicly going after the company and riding the short wave down to the $20's again; if not lower.

2. Technical Indicators

Charting, as I often state, is a love/hate relationship. I dislike it because I don't like the notion of trading a company based on the chart without the fundamentals, but in the computerized algorithmic world of trading that exists nowadays, it's a necessary evil. You have to think like a machine in order to make moves that will preempt computerized runs and raids of stocks -- and that's why I think charting is a necessary evil.

Herbalife's chart, as shown above is dripping with unease. The three most commonly used indicators: RSI, A/D, and Stochastics are all alluding to the stock being in the midst of a downward trend. Couple that will the floor falling out on the share price yesterday, and everything about this chart suggests to me that we are in the very beginning states of a legitimate downtrend.

If you'd notice, yesterday's move was on significant volume, showing that there's been increase selling pressure, thus resulting in the A/D line heading lower as well.

3. International Sales Account for 80% of sales.

The company says it best themselves. They're conducting 80% of their business outside of the US right now, and it's strictly because in order for a pyramid scheme style business to work, you're going to need more and more people. One of the reasons HLF finds themselves flourishing in China is due to the dense population there.

From the Herbalife 2012 10-K:

If we fail to further penetrate existing markets and expand our business into new markets, then the growth in sales of our products, along with our operating results, could be negatively impacted.

The success of our business is to a large extent contingent on our ability to further penetrate existing markets and to a much less extent enter into new markets. Our ability to further penetrate existing markets or to expand our business into additional countries in Eastern Europe, Southeast Asia, South America or elsewhere, to the extent we believe that we have identified attractive geographic expansion opportunities in the future, is subject to numerous factors, many of which are out of our control.

In addition, government regulations in both our domestic and international markets can delay or prevent the introduction, or require the reformulation or withdrawal, of some of our products, which could negatively impact our business, financial condition and results of operations. Also, our ability to increase market penetration in certain countries may be limited by the finite number of persons in a given country inclined to pursue a direct selling business opportunity or consumers willing to purchase Herbalife products. Moreover, our growth will depend upon improved training and other activities that enhance distributor retention in our markets. While we have recently experienced significant growth in certain of our markets, we cannot assure you that such growth levels will continue in the immediate or long term future. Furthermore, our efforts to support growth in such international markets could be hampered to the extent that our infrastructure in such markets is deficient when compared to our more developed markets, such as the U.S. Therefore, we cannot assure you that our general efforts to increase our market penetration and distributor retention in existing markets will be successful. If we are unable to continue to expand into new markets or further penetrate existing markets, our operating results could suffer.

What is going to happen when the international well runs dry? Fellow investor Alex Heisenberg has pointed out to me that he feels there's a direct correlation between the success of multi-level marketing companies and the downturn in the economy. He feels that MLM companies will do significantly worse when the global economy takes a turn for the better, and I agree. Where is Herbalife going to find distributors when there's "real" jobs available?

4. The Company Relies on Distributors, Not Sales of Products

Again -- here's the age old question being raised about Herbalife: are they making their money selling a product or recruiting individuals to become distributors? Again, from Herbalife's own 10-K:

Our failure to establish and maintain distributor relationships for any reason could negatively impact sales of our products and harm our financial condition and operating results.

We distribute our products exclusively through approximately 2.7 million independent distributors, and we depend upon them directly for substantially all of our sales. To increase our revenue, we must increase the number of, or the productivity of, our distributors. Accordingly, our success depends in significant part upon our ability to recruit, retain and motivate a large base of distributors. The loss of a significant number of distributors for any reason could negatively impact sales of our products and could impair our ability to attract new distributors. In our efforts to attract and retain distributors, we compete with other network marketing organizations, including those in the weight management, dietary and nutritional supplement and personal care and cosmetic product industries. Our operating results could be harmed if our existing and new business opportunities and products do not generate sufficient interest to retain existing distributors and attract new distributors.

This is a big deal for two reasons:

1. Again, they're eventually going to run out distributors.

2. It is a massive potential compliance issue.

Conclusion

If I were to introduce you to a penny stock today, tell you all of its major accounts are in the Cayman Islands, a massive hedge fund manager is publicly short, and that it relies on multi-level marketing to survive, would you invest in it? I wouldn't.

This is the same way I feel about Herbalife, even if it is trading at an overvalued $40/share. To me, the fundamentals feel the same whether it's trading at 0.001 or $40.

There is serious risk here for the common investor; much more so than with many other big board stocks. Herbalife is not a stock worth being long in for any amount of time and as the public starts to figure that out, it'll be a great stock to have a short position in.

As always, good luck to all investors.

Source: 4 Concrete Reasons To Be Short Herbalife Right Now