Blackrock Nearly Doubles Stake In Herbalife Ltd. Can 362 Institutional Holders Be Wrong?

Feb.11.13 | About: Herbalife Ltd. (HLF)

This article is not intended to rehash the drama surrounding Herbalife (NYSE:HLF). Articles have well documented the Multi-Million Dollar wrestling match between Bill Ackman's hedge fund Pershing Square and Herbalife investors including Carl Icahn. As a summary, Ackman and his hedge fund announced a short position in the firm in the fourth quarter of 2012. He claims to still be short, as other investors see the depressed stock price in HLF which has fallen since Ackman announced his short position, to be a blessing in disguise. Carl Icahn and others have been initiating long positions and adding to their existing ones. Is this a case of group think, and Ackman has been able to think outside the box, or are the 362 Intuitions and Funds right about the firm?

On December 31, 2012, Blackrock, Inc. (NYSE:BLK) reported in an SEC filing that the investment manager nearly doubled its stake in HLF throughout the fourth quarter of 2012. Blackrock owned approximately 3.1 Million shares as of September 30, 2012 totaling 2.91% of the outstanding float of the firm. After the most recent filing, the firm increased the total ownership to 5.56 Million shares or 5.15% ownership of the company. Blackrock is not the only institution with large stakes in the firm. Below is a list of companies and ownership according to Yahoo Finance.

Top Institutional Holders
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Holder Shares % Out Value* Reported
MORGAN STANLEY 6,541,566 6.06 310,070,228 Sep 30, 2012
VANGUARD GROUP, INC. (THE) 5,735,691 5.31 188,933,661 Dec 31, 2012
BlackRock Institutional Trust Company, N.A. 3,143,977 2.91 149,024,509 Sep 30, 2012
R R PARTNERS LP 2,819,200 2.61 133,630,080 Sep 30, 2012
TIAA-CREF INVESTMENT MANAGEMENT, LLC 2,774,435 2.57 131,508,219 Sep 30, 2012
BNP PARIBAS INVESTMENT PARTNERS, S.A. 2,692,427 2.49 127,621,039 Sep 30, 2012
STATE STREET CORPORATION 2,446,948 2.27 115,985,335 Sep 30, 2012
Herndon Capital Management, LLC 2,399,817 2.22 113,751,325 Sep 30, 2012
CAPITAL GROWTH MANAGEMENT L.P. 2,366,500 2.19 112,172,100 Sep 30, 2012
FMR LLC 17,082,774 15.82 809,723,487 Sep 30, 2012
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Top Mutual Fund Holders
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Holder Shares % Out Value* Reported
FIDELITY GROWTH COMPANY FUND 10,800,210 10.00 496,485,653 Nov 30, 2012
Prudential Jennison Mid-Cap Growth Fd 1,972,704 1.83 90,685,202 Nov 30, 2012
COLLEGE RETIREMENT EQUITIES FUND-STOCK ACCOUNT 1,908,288 1.77 90,452,851 Sep 30, 2012
CGM FOCUS FUND 1,850,000 1.71 87,690,000 Sep 30, 2012
FIDELITY BLUE CHIP GROWTH FUND 1,620,531 1.50 74,495,810 Nov 30, 2012
VANGUARD MID-CAP INDEX FUND 1,498,445 1.39 71,026,293 Sep 30, 2012
VANGUARD TOTAL STOCK MARKET INDEX FUND 1,494,922 1.38 70,859,302 Sep 30, 2012
Munder Mid-Cap Core Growth Fund 1,410,400 1.31 66,852,960 Sep 30, 2012
FIDELITY MAGELLAN FUND INC 1,216,100 1.13 55,904,117 Nov 30, 2012
VANGUARD EXPLORER FUND, INC. 998,010 0.92 51,247,813 Oct 31, 2012
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98% of the HLF's entire float is held by Institutional and Mutual Fund Owners, according to Yahoo Finance. These 362 firms, many of which have purchased the stock at higher prices have not indicated any interest in dumping their shares. Although, as of January 31st, 2013, 33% of the float was borrowed and shorted, at least 20% of which or 60% of the entire float is currently shorted by Pershing Square and Ackman.

HLF has also bought back shares over recent quarters and years. According to a related article, HLF has taken opportunities to repurchase shares at various levels.

2009 - 4 million shares at $18.20

2010 - 5.7 million shares at $26.13

2011 - 5.5 million shares at $54.27

2012 Q1 - .7 million shares at $67.24

2012 Q2 - 5.3 million shares at $46.37

2012 Q3 - 3.9 million shares at $46.37

Based on continued purchasing by institutions looking for value investments and the ability to lower their cost basis in the holding, a short squeeze is imminent on every move higher. Daily squeezes are consistently being seen day after day. The stock has seen many days over the month. The stock has had days in which HLF was down 10+%. After the stock begins to rebound slightly new and existing shorts become squeezed and the stock finishes well off lows and sometimes higher on the day. This continued price action, risk for an upside swing, and institutional buying are reasons to stay away from shorting HLF. Bill Ackman is a brilliant hedge fund manager and can help investors make money in other positions, but based on the reasons listed above, investors and traders should watch this dogfight from the sideline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.