Time is on the side of the shorts in this one, no questions asked. The longs just don't seem to get it.
Why would a seemingly super-smart investor, like Bill Ackman, who has made billions in his career continue to back a losing investment like a short in Herbalife (HLF)? Day after brutal day, week after brutal week, the Herbalife shorts continue to get punished and continue to come back for more pain - sometimes even motivated by the stock running and stating their cases louder and louder in the face of bullish catalysts. It's becoming almost hilarious to the longs (they tell me constantly) - but, I continue to contend that shorts will have the last laugh.
Have we all just gone insane? Are me, Matt Stewart, Andrei Voglin and Bill Ackman the four worst investors in the history of the stock market? If you ask longs, this seems to be the case. Us? One year into a short call that has been nothing short of dead wrong (in the short term, from a price per share standpoint), we remain confident in our positions. In my case, the higher Herbalife goes, the more confident I become. I've gone mad!
What longs haven't done, judging by the responses I've gotten and the bullish arguments on the company, is subjected themselves to even considering the short thesis or the reality of the situation. This is something that could eventually be a costly error.
And, interestingly enough, I'm okay with that. It seems that the difference between the Herbalife longs and shorts are similar to the difference between tattooed and non-tattooed people that my cousin (who is covered in tattoos) is often pointing out to me. This isn't the most apt of analogies, but hey - it's the holidays - so let's just blame it on the egg nog.
Constantly, you see non-tattooed people disgusted about other people's tattoos - making comments amongst themselves and stereotyping. Rarely, however, you see a tattooed person disgusted by a lack of another person's tattoos. I say this as a middle aged man with zero tattoos.
Similar to that, we see Herbalife longs constantly offended, appalled, and simply beside themselves when the shorts present their otherwise extremely rational and sensible argument. Converse to that, we see the shorts simply stoic and assured when the longs present their case and the stock is running. Part of the reason for this is because like me, the shorts believe that time is on their side.
One of the facts of the matter is that great shorts - just like some great long positions - take time to develop and unwind.
So, as time has gone by since Ackman first disclosed his short in December 2012, Herbalife has been on a monster run. But, we've got nothing but time going forward, and the onus is on Herbalife to continue to prove not only that their business model is legal, but that they can continue to recruit at the same clip which they previously have. And, you can say what you want about Ackman, but the one thing he has done is put a damn fine microscope on the company. Everybody is going to be paying attention as to whether or not Herbalife can deliver.
And, accordingly, I have continued to swear up and down that the higher HLF goes, the more I'm going to short. Ackman seems to be in the same camp, but that's his M.O. - doing ridiculous amounts of research, finding confidence in the fundamentals, and sticking by his due diligence.
Ackman, like myself, has come out in the face of recent "good news" (read: audited financials and the Belgian court - that does not govern U.S. law - calling Herbalife a legitimate business) and stood his ground in a recent investor letter to his clients regarding Herbalife:
We will show that the Company's decade-old Lead Generation recruiting methods promoted by Herbalife's top distributors, which were ostensibly prohibited by Herbalife beginning on June 30th-several months after we shared the details of this business method with the FTC, SEC and several State Attorneys General-continue to this day.
We will show that nutrition clubs, which the Company has suggested demonstrate "daily consumption" for products principally from the Latino community, are in fact recruiting venues to attract low-income distributors who do not have the $3,000 required to become an Herbalife supervisor.
We will show how Herbalife's Chinese operation likely violates the multi-level marketing restrictions in that market. We will share data that will enable investors to understand the extremely high distributor failure rates in countries around the world, providing additional evidence of the deceptive nature of what Herbalife management calls "The Best Business Opportunity in the World."
Ackman's letter continues to lob shots at Herbalife, claiming the New York State Police Department Hispanic Society has, just last week, publicly decried Herbalife as a company that has been ripping off Latinos in New York.
Ackman also points out something that I alluded to in my last article:
In our experience, there is a high degree of correlation between the accuracy of a short seller's arguments and the aggressiveness with which the target company attacks the short seller. In contrast, in cases where a short seller is wrong, the target company typically responds by providing full transparency to the investing public in lieu of attacking the short seller.
Pershing Square makes the same point that SA contributor "The Specialist" has made in the comments to several articles - that Belgian law doesn't preclude Herbalife from being a pyramid scheme under the parameters of U.S. law - where it matters.
Another (stupid) argument that has popped up in the comments section of several bearish articles on HLF is that Shane Dinneen - the man at Pershing Square responsible for the boatloads of Herbalife research performed - was given a leave of absence, seemingly due to the stock's performance. Scandalous sounding, right?
The problem with this argument, is there's absolutely zero proof or evidence to support it (yikes!). Calls put into Pershing Square confirmed that he did, in fact, still work there.
Business Insider reports:
There's a rumor going around that Shane Dinneen, the Pershing Square hedge-fund analyst who worked on the firm's famous Herbalife short, has been canned.
We've been in touch with Pershing Square. The firm denies that Dinneen has been fired, according to a spokesperson. A person who answered Dinneen's phone said he was not immediately available but still with the firm.
So, from an upside to downside comparison here, staying short remains the best bet for me.
From an upside potential, the company currently has a value of $8 billion and a P/E ratio of 17 - with a price to book value of 18. So, the market is valuing the company at a lofty clip in the face of last quarter's waning revenues. Unless you ask Carl Icahn, who seems to think the company commands a P/E of 20 - still limited upside for the stock.
Another thing that longs don't seem to understand is that the short squeeze thesis is already off the table. The stock is up over 100% since Ackman placed his bet - the shorts have officially been squeezed out from that point. But, according to Yahoo Finance, 30% of the float continues to be held short - what does this mean? What this means is people have been shorting HLF all the way up - the higher prices continue to make the company a more attractive short. Contrary to what retail longs think/argue, they're not going to come together to squeeze Ackman out of his position. That's just not how Bill operates.
As I said in my last article, 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. I find it likely that regulators are eventually going to step in and prove the shorts right.
I'm reaffirming that I'm taking my short thesis, with Ackman, "to the end of the Earth."
Happy Holidays and best of luck to all investors.