First and foremost, I wish every company that I invested in spiked 11% in total valuation simply for having audited financials complete. It's great that the company has those in hand now, but even some bulls weren't quite sure that news of this stature warranted an 11% spike in the company's valuation. As Herbalife (HLF) toys with going red today, we see saner heads prevailing a bit.
Having said that, the bears are eating a little crow this past month with the release of Herbalife's re-audited financials, and the Belgians overturning a court ruling that once deemed the company a pyramid scheme.
Yes, I thought there would be a hold up with the financials, and there wasn't - so, I was wrong and I admit it - but it does little to curb how I continue to feel about Herbalife's business model.
It remains the Herbalife bears versus the rest of the world. According to the longs, Herbalife's audited financials say that the bears have already lost. But, according to investing 101, no one loses until gains or losses are realized. Having said that, it seems like a great day to add to my Herbalife short. And, for posterity several years from now, let me recap my updated list of people that I think have it wrong on Herbalife - all of whom have more money and experience than I do. I'll note simply for fun:
- The Belgian Court system
- Carl Icahn, Will Stiritz, et. al, including any other 80 year old billionaire that wants to throw his/her name into the hat.
- Any and all Herbalife longs and/or company "distributors"
Seeking Alpha itself pointed out this morning that the audit has to do with GAAP accounting standards, and not necessarily the business model. Jim Cramer, who is someone that I don't even like agreeing with, even has it right.
- Meanwhile, some commentators were quick to note that the re-audit had little to do with the bear case in the first place. Here's Herb Greenberg: "Let's not forget, the role of the auditor is to determine whether the numbers are audited in accordance with GAAP, not to weigh in on the [pyramid scheme] controversy."
- Similarly, here's Jim Cramer: "[I'm] just stating, frankly, the obvious - that the audit wasn't about Ponzi schemes."
Additionally, I'm loving blogs like this one, claiming that the short sellers have already "lost":
For the last year, the battle has raged over Herbalife (HLF). The battle is now over.
It would seem that short-sellers like William Ackman, who initiated the battle nearly one year ago, have lost. Badly.
If someone shorts Herbalife today, have they lost? Does this Barron's blogger have a crystal ball? If Herbalife goes to $115 tomorrow, the shorts will have still not "lost". Did short sellers lose when Enron or MBIA went skyrocketing to $70, right before their implosion? They lost if they covered, they won if they hold resolute and steady.
Surely this has shaken Ackman's stance on the company, right? Let's take a look at the stone cold statement Pershing Square issued in response to the re-audit:
"It is not the role of Herbalife's auditor to determine if the company is a pyramid scheme. Rather, that determination depends on whether distributors earn more from recruiting new distributors than from retail sales to consumers who are not distributors. The few Herbalife distributors that make money earn the vast majority of their profits from recruiting. Herbalife is a pyramid scheme that will be shut down by regulators."
Interesting. Sure doesn't seem to have shaken Ackman's resolve one bit. But what does he know, he's just a billionaire with a proven track record of finding long-term financial unsustainable shorts and profiting handsomely off of them.
You can call me an "Ackman ass kisser", you can call me a "non-savvy investor", you can say I'm "thick" (Note 1) - none of that is going to change the fact that Herbalife derives its revenues from recruitment, and not retail sales.
Additionally, I'd like to note that I'm not trading on emotion, as most people suggest is the issue. Bulls think that Herbalife bears are simply morons that can't admit they're wrong, but I have news for them - people trading on emotions would have went long a while ago. People that trade on their emotions cannot be resolute or steadfast in a position, and often try and jump on the "trend", usually to find they're holding the bag or selling at a loss.
What I'm doing is quite the opposite. I'm trading on the fundamentals, and the fundamentals say that the company is a pyramid scheme, and isn't worth the valuation the market is placing on it. Icahn came out yesterday and argued on CNBC that the company should be trading at a P/E of 20, with slowing revenues. I'm surprised that while we were coming up with unrealistic scenarios he didn't simply suggest that it trades at a P/E of 120. Because, why not?
Aside from the demonstrable evidence that the business plan isn't fundamentally sound and fits the SEC's definition of a pyramid scheme to a tee (Note 2), longs continue to blindly think that Herbalife has long-term growth potential.
And let's just get really nuts here for a second. Say the FTC doesn't step in on Herbalife and it runs to $115 - there's a masochistic part of me that wants to see the company crumble without the regulatory catalysts. The company's fundamentals seem to allude to the company dismantling eventually, at some point in the future when the rate of potential distributors being born daily surpasses the need for Herbalife's expansion. Generally, the FTC is tasked with the point of shutting these things down before they get bigger, but, anything's possible.
If the FTC steps in and fines the company, issuing new guidelines for operations, that could be one of the better end solutions for Herbalife - one that would likely result in a "soft landing" rather than a "hard crash." One way or another, it would be a reality check. Either someone steps in and shuts the company down, or the company eventually shuts itself down.
I stand by the fact that Herbalife is not a long-term investment vehicle, and it's a company that carries with it a risk of major loss. There are many other fundamentally sound companies that deserve your investment more than Herbalife. Momo players and day traders may disagree with me, but I'm talking about a long-term outlook.
I'm taking my short thesis, with Ackman, "to the end of the Earth."
(1) In the interest of transparency, all names taken verbatim from various e-mails, Tweets, and messages from Herbalife longs.
(2) Really, they do. To a tee. Here's proof.