Dietary supplement maker Herbalife (NYSE:HLF) is at the center of a battle between two investors setting the tone for Wall Street today. Almost a year ago, hedge fund manager William Ackman publicly compared Herbalife to a pyramid scheme. Furthermore, Ackman backed his words with a $1 billion bet that Herbalife stock would deteriorate. Interestingly, heavyweight investor Carl Icahn (NASDAQ:IEP) has doubled down on Herbalife by buying enormous amounts of stock. In the wake of support from big names like Icahn and George Soros, Herbalife's stock price has remained strong, doubling in the past year. So far, Herbalife's Wall Street success has cost Ackman an estimated $400 million.
This competition between Icahn and Ackman has rapidly turned into an all-out war that blurs the lines between levelheaded stock trading and outright gamesmanship. While both sides have taken strong measures to fortify their positions, Ackman is particularly media-savvy in his attempts to undermine confidence in Herbalife. Although Ackman can seem self-serving at times, he raises very meaningful and important questions about Herbalife's practices and business model.
According to Herbalife president Desmond Walsh, the company's re-audit is on track for completion by the end of the year. Overseen by PricewaterhouseCoopers, this re-audit is the first step towards a possible resumption of Herbalife's terminated stock buyback program. Seemingly indefatigable, Ackman sent PWC a 52-page letter in September, comprehensively attacking Herbalife and discouraging the accounting firm from getting involved in the re-audit. Only time will tell if Ackman is truly concerned about improprieties at Herbalife or if he is simply doing his best to reverse the outcome of his short position in Herbalife.
In Ackman's defense, Herbalife is certainly no stranger to controversy. The hedge fund manager certainly had personal reasons for discussing Herbalife with the SEC and the New York State attorney general's office. On the other hand, the attorney general took Ackman's allegations seriously enough to subpoena a former Herbalife employee for internal company documents. The attorney general is interested in Herbalife's response to a 2011 product contamination scare. In that episode, Herbalife's factory testing determined that some of its products contained metal particulates. Herbalife promptly isolated and destroyed the contaminated products and no unsafe supplements reached the public. However, Herbalife contradicted the advice of some safety experts by limiting the scope of its product eliminations. In another controversy, some civil rights leaders are calling for investigations into Herbalife's impact on the Latino community.
Needless to say, Ackman isn't taking his Herbalife losses lying down. On October 31, Ackman announced an Herbalife presentation for November at the Robin Hood Investment Conference. Ackman claims that his firm, Pershing Square, has learned important new information through questioning former Herbalife employers. Presumably, the new information is highly damaging to Herbalife's stock and prestige. If this information pans out, Herbalife will experience one more in a string of setbacks. The company's stock price immediately stalled upon Ackman's announcement. Up until now, however, the supplement company has moved past every crisis with renewed confidence and success.
Ultimately, it is difficult to say whether Ackman or Icahn will succeed in the struggle over Herbalife. Even if Ackman loses his massive bet against Herbalife, it is safe to say that the hedge fund manager will maintain his enviable fortune and career. It is fascinating and a little alarming how the calculated actions of billionaire investors affect the fortunes of their ordinary, day-to-day counterparts. People can partly insulate themselves from these effects by keeping up to date with the latest Wall Street developments.
Until Ackman's November "show" and the audit report from PricewaterhouseCoopers is finalized, we recommend that Herbalife shareholders take some profits from their big gains and continue to maintain a HLF position because our hunch is that Carl Icahn may continue to be right.