Through The Herbalife Looking Glass

| About: Herbalife Ltd. (HLF)

Every day, things get a little weirder in the world of Herbalife (NYSE:HLF). I've disclosed that I'm bearish on Herbalife in the long-term, as I'm from the Bill Ackman school of thought on the company: it's a pyramid scheme. I closed my short on Herbalife a week or so ago for funding allocation reasons, and am waiting for a point to re-enter short - which I could do as soon as Monday.

Herbalife is a company, that when looked at through the right looking glass, is as risky of a long term investment as it's going to come. And, years later, people would like back to times like now and say "the signs were there all along".

To me, the evidence seems to continue to present itself in convincing fashion. Aside from this 300 slide presentation and speech that Herbalife is one of the most elaborate and blatant pyramid schemes the world has ever seen; there's been recent distributor protests and continued negative headlines regarding the company.

Again, if you haven't watched the entire first Ackman presentation, it's well worth your time.

Additionally, it's been noted that Ackman is going to be making yet another presentation on Herbalife, chock full of new information. reported:

Activist investor Bill Ackman is preparing another major presentation on Herbalife, a source told CNBC on Thursday.

The presentation, set to be made at the Robin Hood Investment Conference in November, will include new information that his firm, Pershing Square, has uncovered after speaking with several former employees of the company, according to the source.

This conference is coming up in just about 2 weeks - and I'm extremely interested in what Ackman has to say. Why? Because, as I said in a previous article there is zero doubt with me: Bill Ackman and his team have a seemingly unprecedented grasp on the Herbalife business model, which is almost impossible to decipher. I would bet heavily that Bill Ackman, who is famous for doing insane due diligence (he read through 140,000 pages while doing his MBIA research), knows more about the company and its operations than probably 95% of its own distributors and definitely a large portion of its stockholders. If you doubt this, you clearly haven't watched his first presentation.

But, I digress.

Since Ackman has gone short the stock, the company's legal fees have increased significantly as it battles class action lawsuits and other litigation tied to its business practices. These legal and advisory fees have added up to about $24 million.

Nonetheless, the Herbalife train continues fast and furiously upward. Investors, as of today, have yielded 50% in the last year alone, and over 100% since the beginning of 2013. You can't argue with those results, I admit - but whether they're based on fundamentals and valued correctly, that's another question. I still think the ride down for Herbalife is going to be ugly.

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And, big investors - who I assume are smart enough to see that Herbalife is a scheme, but are more enticed with making money off of it before it collapses - continue to pile in.

Bill Stritz disclosed a more than 5.2% stake in the company. Richard Perry picked up more than 2.6 million shares in Q3, which equates to a $180 million position. In addition, Stan Druckenmiller bought 79k shares of Herbalife through his Duquense Family Office. In the same filing, he sold Procter & Gamble (NYSE:PG). Talk about moving safe money to risky areas - jeez.

But again, how many times in recent history can you count of fund managers moving money into or out of investments - not because they're long-term buyers or interested in the fundamentals - but because they think they can make quick money. These major buyers, I assure you, are not going to be long-term Herbalife investors.

It was announced last month that Herbalife was pushing the "fight against obesity" into Cambodia. That's right, Cambodia. When I hear Cambodia expansion, I sure as hell don't think about obesity - the first thing that comes to mind is that Herbalife could very well be running out of countries to expand to. The Specialist dryly noted the same quagmire:

Shouldn't the war on obesity be fought on battlefields that have an opponent? Herbalife is now entering into Cambodia. This comes at a time when obesity is rampant in the United States and the culprit people love to blame are the fast-food giants such as McDonald's (NYSE:MCD), a company that has no locations in Cambodia. Burger King Worldwide (BKW) only just last year entered the country. It's ironic that the number one obesity fighter, Herbalife, is in a country ahead of the number one blamed for obesity, McDonald's. Is this a sign that Herbalife is running out of new markets to expand into?

Today, Friday, the NY Post produced an interesting piece on the company, whose reputation and credibility continue to be in question in headlines all over. The piece states:

Herbalife is making its new salespeople sign away their right to the sue the company.

The new restriction in Herbalife's latest agreement with distributors comes as the protein-shake peddler, led by CEO Michael Johnson, spends more on legal fees to defend against allegations that it is a pyramid scheme in which most of its salespeople lose money.

"You agree that, by entering into this agreement, you and Herbalife are each waiving the right to a trial by jury … Class actions shall not be permitted," it reads.

The agreement, which went into effect in August, requires that the company and its network of independent distributors agree to settle any disputes through arbitration.

This news comes on the heels of the legal noose tightening a bit for the company, as just last month a U.S. District Court threw out a motion filed by Herbalife to dismiss a suit that was filed by a former distributor - claiming to want class action against the company.

In addition, and from a legal perspective - if the company works with independent distributors, there doesn't seem to be the type of serious need for wording like this in an independent distributor agreement, wherein the success or failure of an individual should be predicated on that individuals own actions. It's completely extraneous.

What it does do, in this investor's opinion, is offer yet another nod that the company may have some questionable business practices - and that the success or failure of its distributors may, in fact, be predicated on the business model itself. It's admission by omission, in a sense.

Taking into account these recent events, I continue to lean bearish on Herbalife. I've never been more confident that the "red flags" that are being glanced over by longs (Ackman's presentation, lawsuits, protests, denial of distributor sales vs. retail) will supplement this addendum to Herbalife's agreement as signs that were out there - that longs missed by looking at Herbalife through their bullish looking glass.

Common sense will prevail, Herbalife will eventually crumble.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in HLF over 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.