Herbalife (NYSE:HLF) is famously contentious, with prominent investors lining up on both the long and short side of the stock. Starting with David Einhorn's question on Herbalife's call (rumored to have coincided with a large short position by his hedge fund Greenlight Capital), which knocked the stock down considerably in one day, some of the best known investors have publicly traded the stock.
Bill Ackman followed up Einhorn's conference call questions with a full fledged multi-hundred page presentation, delivered over a few hours at a value investing conference and revealing a billion dollar short position. Carl Icahn returned fire shortly after, first arguing with Ackman publicly on CNBC and then buying a material portion of the stock and publicly disclosing his position. Other famous investors like Dan Loeb and George Soros followed suit, and more recently Bill Stiritz followed Icahn into the stock, driving it up and leading to paper losses to Bill Ackman's Pershing Square fund of reportedly up to $1 Billion.
Recently, a wrench has been thrown into the investment thesis of the investors long Herbalife stock. China initiated an investigation of Nu Skin (NYSE:NUS), a multi-level marketing company that Bill Ackman noted in his presentation as having numerous similarities to Herbalife. The long thesis had been that, even if Ackman was right and the US cracked down on Herbalife, its US earnings were only ~20% of the company and virtually all Herbalife's growth was coming from promising foreign markets like Brazil and... China.
Not surprisingly, Herbalife stock gapped down after the news about the crackdown on Nu Skin, as investors began to price in the potential of an investigation into Herbalife's operations in China, which could materially affect Herbalife's earnings and growth prospects.
One investor who may not have been too surprised by this is actually a former owner of Herbalife, the former Managing Director of JH Whitney. As I mentioned in this recent article (link), he passed up a potential opportunity to buy out Herbalife at the price he bid for it in 2007, $38 per share, and potentially double his money from that price to the share price on January 16th (or almost triple his money buying stock in the open market at or near the low in December 2012). Instead he was researching and then buying stock in this small-cap oil company (link), buying over 30% of the company at an ultra-low price of one third of proved reserve value.
In that article, I discussed the possibility that that company might have been a better value than Herbalife. But it is possible that, rather than being cheaper, it may have been similarly cheap but much less risky. Regulatory risk can be hard to measure, particularly in risky businesses like multi-level marketing. And fundamentally, buying oil companies at a fraction of proved reserve value, particularly if they are growing rapidly, is generally not considered particularly risky.
It will be interesting to see how things play out in China and here in the US. Perhaps Herbalife will be investigated. And perhaps if it is investigated, it will be indicted for engaging in what Bill Ackman essentially calls a ponzi scheme. And perhaps it will not. Regardless, it is possible to find other very attractive investments not exposed to such regulatory risk, and as mentioned here (link), the investor who made his co-investors and clients up to $1 Billion in Herbalife from 2002-2007 has found such an investment in the form of this small cap oil company.
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