Is Herbalife A Short Squeeze?

| About: Herbalife Ltd. (HLF)

Is Herbalife (NYSE:HLF) rising phoenix-like from the ashes similar to Netflix (NASDAQ:NFLX), Green Mountain (NASDAQ:GMCR), and Chipotle (NYSE:CMG)? The almost 6% pop after earnings on Monday in after hours trading was completely erased on Tuesday with a stunning reversal in price closing at $59.90. On Wednesday price moved up on a CNBC report that Soros had a large long position. Is HLF going higher on a short squeeze because Ackman announced he still has a large short position according to CNBC?

These stocks were knocked down by the shorts. Now they have all bounced up and what does that mean?

In the chart below we show some fundamental metrics for these stocks plus a quantitative rating from 2 services I market. Herbalife looks the best of these stocks from a value perspective, but it looked good fundamentally when it was pushed over the cliff. Nothing much has changed. has a new auditor. It cut loose some of its multilevel marketing groups. It may change the titles of "distributors" who are not really distributors but end users of the product according to an S&P analyst on Bloomberg Monday. This was confirmed in the HLF earnings conference call Tuesday.

The elephant in the room of course has nothing to do with fundamentals when you discuss Herbalife. The question to be answered is: how does Herbalife make its sales? Are people brought into a multilevel marketing scheme where they buy the product hoping to become wealthy by bringing in distributors, fail at that and end up using the product themselves if they can? How many repeat, end-user customers are there and what percentage of sales are made to end using customers who are not distributors? Outside of selling to distributors who want to become rich, is there any extensive market for HLF products?

Other industries have similar practices. Some unethical stock brokers and financial advisers sell customers investments where they receive high commissions knowing full well their customer will probably lose money on the very risky investments. They of course lose that customer and go on to find other customers to shear.

Is Herbalife doing the same thing when they sell their products to distributors? If so how long can they continue to find other "distributors" and how many will lose all their money buying into a Herbalife distributorship? The new auditor has to answer these questions to determine if Herbalife is a "going concern."

I am sure the short term answer will be "yes." We know such financial advisers and multilevel marketing firms stay in business for a long time, just like Madoff. Their customers and distributors are the ones that lose their money, not the brokers or the corporation. They make money. The latest earnings show how profitable the Herbalife business model is despite the elephant in the room.

In the matrix below, HLF shows an attractively low forecasted price earnings ratio of 10.7 compared to forecasted growth of 15%. Monday's good earnings report took price up to $64 after hours, up 5.7%. Some 6 of the 8 analysts had a buy before earnings. One of my services had it as a "very bullish" rating; another had it rated a "strong buy." The analysts and the quant systems were right. The mean analyst target of $58 will probably rise now that price is well above it. However when price starts hitting the 12 month target, it usually pulls back to test support. Right now there is a lot of short squeeze hype in the price.

As you can see in the box below, NFLX, GMCR, and CMG are rated only neutral by Chaikin and only weak buys by StockpickerUSA. NFLX has an FPE of 78, only 5 analyst buys and a target of 224 vs. a price of 246. I guess we can expect that price to pull back a little when the market takes a dive.

symb pric P/B P/S FCF FPE


chaikin usa targ anal
HLF 58 18 1.4 18 10.7 15% vbullish sbuy 58 6b/8
NFLX 246 13 3.6 NA 78 21% neutral wbuy 224 5b/21
GMCR 75 5 2.7 31 21 22% neutral wbuy 84 10/13
CMG 405 9 4.3 38 32 20% neutral wbuy 415 10/23

The GMCR numbers look ok but certainly not undervalued. At least the 12-month analyst mean target of $84 allows for some upside from the current price. CMG is overvalued by these metrics and is so close to the 12-month target that something has to give. Either price is going to drop or the analysts are going to capitulate and move that target higher. My guess is price pulls back with the next market pullback

Conclusion: Stocks that are extremely overvalued as some of these will fall hard when the market has its next pullback. Those with questions overhanging their business model will also do worse than the market on a pullback. If HLF is involved in a short squeeze, price will whiz past analyst targets until the short is covered, if indeed Ackman decides to cover his large short position at these prices.

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.