Why Herbalife Isn't Going Anywhere

| About: Herbalife Ltd. (HLF)

At the end of Tuesday's trading session Herbalife Ltd. (NYSE:HLF) leaped an eye-widening 7% on news that Post Holdings (NYSE:POST) Chief Executive Officer William Stiritz reported a 5% ownership stake in the company. Stiriz's position makes him the single largest stakeholder of the nutritional supplements maker. Taking Herbalife's recent momentum as well as its high-profile buyers and sellers into consideration, it is a key time to examine whether or not Herbalife is a viable long-term position or not.

As one of the most powerful Multi-Level Marketing companies in the industry, Herbalife has consistently outperformed despite constant negative media coverage stating the contrary would occur. One of the most notable arguments against the company is the notion that it does not possess a sustainable business model. The logic behind this argument is that the company cannot sustain a business model in which its primary stream of revenue is from temporary subscribers. As a company, Herbalife promotes its "Business Opportunity" around the world and has now grown exponentially in Latin American markets, where Herbalife reels in entire packs of individuals at enormous conferences. With a market cap now past 6.60 Billion, the company doesn't appear to be slowing down anytime soon either. Therefore, in order to better understand the future of the company we must clearly define why or why not Herbalife has a sustainable business model.

In addressing the notion of Herbalife's business model we should examine another company that has been around and sustained its growth for the last 100 years with a similar method of business and revenue stream. Avon Products (NYSE:AVP) has been around since 1886, and similarly to Herbalife, has utilized the recruitment of "sales reps" as a venue for generating vast profits at the financial expense of their own recruits. The company has rebranded itself many times in an attempt to avoid the reputation of being a "pyramid scheme" and strangely enough, this approach has appeared to work and Avon is now considered a legitimate sales company. Keeping Avon's history in mind we have to realize that Herbalife has already been around for over 33 years now and the company itself is only gaining more momentum with the last three years displaying consistent year-over-year revenue growth.

Additionally, the sustainable business model argument against Herbalife fails to consider that MLM's are a generational habit. Meaning that with every new generation of individuals comes a new generation of people getting lured into the tales of potentially making "millions" from the company's supposed business opportunities. In layman's terms, there is never a lack of people in the world through which Herbalife couldn't tap into profiting from. Another factor which anyone shorting the company should definitely consider is Bill Ackman's most recent comments pertaining to Pershing Square Capital Management's position on the company:

""We believe that Herbalife was a good short sale at our cost, and an even better one at current values and in light of recent developments," Mr. Ackman wrote. "Our batting average on our active long investments is 16 out of 19, or 84%, and 4 out of 5, or 80%, on the short side, with Herbalife in the undecided column."

Mr. Ackman said there are two key ways for Pershing Square's Herbalife short position to work: regulatory intervention or a decline in the number of new independent distributors. He cited new rules the company has since taken, including discouraging loans for distributors, and the departure of some top sellers to other companies."

The problem with Ackman's logic in the comments above are that his entire short position is centered on the premise that Herbalife will stop growing its base of independent distributors and or regulatory intervention will occur by governing bodies. Firstly, if governmental regulation has not occurred in the last thirty-three years then what is the likelihood of it occurring now? Secondly, with the company's revenue growing every quarter it could be years and or decades before we see significant decreases in the number of independent distributors. That being said, Herbalife is operating internationally now, meaning that they can easily move from country to country, constantly increasing their base of independent distributors.

With Ackman's fund, Pershing Square, currently facing a massive paper loss of 1 billion dollars from a short position initiated approximately nine months and Herbalife shares up more than 100% since, it does not seem as though now is the time to be holding onto a short position. Additionally major buy-ins by key players such as George Soros, Carl Icahn, and William Stiritz make Herbalife a potentially volatile powder keg, which could move up or down on the basis of a major purchase and or sale by any of these investors. In conclusion, arguments that Herbalife doesn't have a sustainable business model are riddled with parallel historical instances, which prove otherwise. Therefore it is important to be cautious of any and all positions in this stock and my recommendation is to simply remain on the sidelines.

Among the eight analysts polled on Herbalife six have recommended it a "buy" whilst two have recommended it a "hold."

This article was written in unison with Justin Galloway.

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.