Are Herbalife Whale Watchers Watching The Wrong Whale?

| About: Blyth, Inc. (BTH)

The Herbalife (NYSE: HLF) short squeeze saga involves many of the biggest "whales" in finance, but "whale watching" investors may be tracking the wrong ones to help decide their most profitable course of action. For those investors new to the term, in the financial industry "whale watching" is defined by as "An investing strategy of monitoring the investments of the most influential or wealthy investors". Following what is essentially a "who's who" of elite activist hedge fund managers, it appears that hundreds or maybe even thousands of investors have chosen sides to go long by buying Herbalife shares with Icahn, Soros, Loeb and Chapman or short with Ackman, Einhorn, etc. Everyone watches with bated breath for the next tweet, interview, filing etc of any of the aforementioned parties - whale watching in a fishbowl if such is possible. Each of the aforementioned whales has generally been perceived to be among the best minds in finance and all have earned their dorsal fins by doing what they do remarkably well, doing it repeatedly and almost always winning. As the saga evolves to the stage where the most important whale watching may be by the other whales, I wanted to take this opportunity to point out that one of the biggest winners will likely be the whale who took early profits from the Herbalife short squeeze, but appears to have "doubled down" on the MLM short squeeze strategy in a move so deft and strategically fruitful that other investors should give strong consideration to watching what he is doing and how he plays the game going forward.

Following the Whale That Can Make You The Most Money

Whale watching is more fun if you follow the whale that can make you the most money. I believe it is fair to say that John Rochon is a whale by most measures and he is best known for engineering historic and profitable deals that has occurred in the MLM space - the LBO of direct selling pioneer Mary Kay Cosmetics that made everyone involved wealthy or a lot wealthier. His Private Equity shop Richmont Holdings has acquired very large stakes in Avon and made bids to acquire the entire company more than once. One of his current ventures, CVSL, (OTCBB: CVSL) is a company built from the ground up for the purpose of consolidating the most attractive segments of the MLM/direct selling space. Thus, one of the reasons that Herbalife longs, shorts and whale watchers playing the Herbalife trade might want to follow Mr. Rochon's lead is that he has something that none of the high profile whales has - a hands on, lived it for 30+ years understanding of what makes MLM/direct selling companies (like Herbalife) tick at a level that even the academic and regulatory experts brought in by the other whales cannot match. I think the best evidence of this advantage can be seen in what he has already accomplished in the "buy, sell or short the MLM" game -

1) Through CVSL, Mr. Rochon acquired a "large position" in Herbalife sometime after June 30 (CVSL 10Q ending June 30 confirms no HLF stake, while interview in September acknowledges the stake's purchase and sale) while the stock was trading in the mid 40's.

2) CVSL sold the HLF stake sometime in August or early September when HLF was trading in the mid 60's. It seems most likely that CVSL sold the shares in August, but at a minimum we know the stake was sold in a time frame that would allow the company to build a stake in Blyth before September 12. A review of Herbalife's chart indicates heavy buying of HLF shares in early July and heavy selling of HLF shares in late August which fits perfectly. Since the Blyth chart indicates heavy buying in mid to late August, this fits squarely within the time frames one might expect based on buying and selling of the "large position" in Herbalife that was mentioned in the interview and also in line with the building of a significant stake in Blyth prior to the interview on September 12.

3) CVSL sold its HLF stake to purchase a "substantial stake" in Blyth (NYSE: BTH) , linking the nascent startup to the venerable 30 year old billion dollar revenue (2012) generating MLM with the $185m market cap. The move was sheer genius - not only would CVSL benefit if Blyth's stock moves higher, but it allowed for the possibility that the stake would thrust CVSL into the spotlight as a significant player in the space. Given its stated goal of acquiring other direct selling companies, this could do much to get the CVSL name into the conversation around the industry. Better still, the additional exposure to investors in other MLM companies and exposure to more investors generally that might follow the successful acquisition of a stake in BTH had the potential to make this a winning proposition in other ways too. In the days since CVSL's stake in BTH has become more widely known, CVSL shares have more than doubled, reaching a level yesterday that gives the company a market cap of nearly $350m roughly 2x the size of Blyth's market cap.

4) The Herbalife short squeeze trade has the potential to evolve at this stage to a game of whales watching whales, as each on the long side must proceed with a close watch on what the others are doing, recognizing that the exit of even one has the potential to materially impact the profits of the others on this trade. As this process unfolds, the whale we should all probably be watching (John Rochon) has already cashed in and reinvested in another MLM company (Blyth) that is arguably a better short squeeze candidate than Herbalife.

Can There Be a Better Short Squeeze Candidate Than Herbalife?

While Herbalife remains a good short squeeze target in many respects, it is currently trading over 150% higher than it was when the squeeze began following Bill Ackman's presentation and proclamation. Herbalife still remains on all the high short interest lists, ranking at #39 on the NYSE for having such a large percentage (25.5%) of its float sold short. With large institutional and insider ownership taking up a significant portion of the remaining float and the obvious advantage of having some of the deepest pockets and savviest minds in finance still on the long side, Herbalife is a stock that can still move higher quickly on any positive catalyst, but there has already been a substantial short squeeze to get the stock to its current levels and its public float has considerably more wiggle room for short sellers to maneuver than the current situation with Blyth.

In Blyth, Mr. Rochon's CVSL has found a billion dollar per year revenue producing (2012) MLM/direct seller that is still trading approximately 75% off the highs from 14 months ago and only slightly above the 20 year lows of its trading range and it is currently ranked #1 on the NYSE in terms of percentage of public float sold short. Because Blyth has a public float of only 6.5m shares, CVSL can command a very important status by acquiring a relatively small stake and in the process, gain tremendous exposure for CVSL among investors and potential acquisition candidates. Mr. Rochon's vision in deftly acquiring the BTH stake at time when BTH's short position had swelled to consume the majority of its public float (it was over 70% at the time) gives CVSL an even more powerful position than it would have otherwise. As such, going forward CVSL's additional purchases will necessarily have a significant impact on the trading of BTH even with relatively small additions to their holdings. The recent revelation of its stake in BTH has already helped CVSL gain a level of notoriety that would not have been likely to be achieved with the HLF stake (too many whales in the fishbowl).

While the whale watching we have enjoyed with the Herbalife short squeeze continues, whale watchers will want to add CVSL and BTH to their watch list so they can watch the whale who may turn out to be the biggest winner in the MLM short squeeze game. Last night's short interest update from the NYSE indicated that Blyth now has over 90.51% of its float sold short, what I believe this to be one of the highest short to float ratios in NYSE history. With only 600,000 shares in the BTH float that have not already been sold short, CVSL essentially has the BTH short sellers cornered, as they will likely have to purchase over 5.8 million shares of a relatively thin trading stock to cover their bets in the near future. Any significant catalyst would likely catapult BTH shares higher, bringing more attention to the situation and greater exposure for CVSL. Even without a company or industry specific catalyst, the freakishly high short to float ratio and resulting lack of shares available to be borrowed for a short sale could cause the shares to move materially higher on any uptick in buying interest, causing the CVSL/BTH story to develop into a story that is more interesting and profitable for whale watchers than the Herbalife trade.

Disclosure: I am long BTH. 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.

Additional disclosure: My intent in publishing this article is to inform investors about developments related to Herbalife and Blyth. I did not and do not intend to suggest any specific action by any investor or shareholder and strongly suggest that any decision made to buy or sell shares of this stock be made after consultation with an investment advisor as to the suitability of such an investment. I currently own shares of BTH and consider my investment in Bth to be a trade that could turn into a long term holding depending on marketplace developments and the company's execution of its growth plan. I may buy or sell shares at any time based on market conditions and the trading price of BTH.