Seeking Alpha
Long/short equity, contrarian, special situations, wild cards
Profile| Send Message|
( followers)  

For months, there had been speculation about Pershing Square's top analyst, Shane Dinneen, and whether or not he remained at the firm. Dinneen was the analyst responsible for putting the meat & potatoes of the Herbalife (NYSE:HLF) short case together, and he presented a fair amount of Ackman's original thesis presentation at the Sohn Conference in 2012.

Herbalife bulls were arguing consistently that Dinneen was "fired" for "losing" on his Herbalife bet. That theory, although probably the crudest and easiest one to come up with using the least amount of brain power, doesn't make sense. We know now that he wasn't fired, and we certainly know that while Pershing has taken paper losses on Herbalife, they're far from "losing" in the grand scheme of things.

One could argue that Herbalife bears have made the most progress that they've made since Ackman's original thesis - the stock has pulled back from the low $80 level to the low $60 level in the past few weeks. Bears that have shorted on the way down are profitable to the tune of over 20% if they timed this dip correctly.

A U.S. senator is urging a probe, China is probing Nu Skin, the media is scrutinizing Herbalife, and the NY Post reported yesterday that Canada has now joined the list of countries probing the company. Tim Ramey, Herbalife's biggest bull (and, according to ValueWalk, the reason no one trusts "analysts") has left his firm, reportedly to join Bill Stiritz in organizing an Herbalife LBO. The question to bears who claim Dinneen was fired is obvious - why would anyone fire him now, in the middle of what could potentially be Pershing Square's validation?

Regardless, it wasn't a major surprise when something aside from rumors was finally reported yesterday. Bloomberg reported yesterday:

Bill Ackman, founder of Pershing Square Capital Management LP, told clients that Shane Dinneen, the analyst who had done much of the original work on the firm's money-losing bet against Herbalife Ltd., has left.

"For several months, Shane Dinneen, a member of our investment team since late 2007, has expressed interest in leaving Pershing Square to pursue other interests," Ackman wrote yesterday in a letter, a copy of which was obtained by Bloomberg News. "As Shane is one of the most talented investment analysts I have ever worked with and someone I hold in high regard, I have done my best to convince him to stay with the firm. Recently, he decided it was time for him to move on to areas of his own interest outside of activist investing."

Despite the news, where Ackman comes off as genuinely upset that his right hand man is leaving, he remains resolute with his Herbalife thesis, dropping a few interesting quotes that show he seems to be potentially making serious progress with regulators. These quotes from Ackman, reported yesterday from the same link offered above, show that he is not only still dedicated to his Herbalife thesis, but that progress has been made:

  • "With respect to Herbalife, we remain convinced that the company has operated an illegal pyramid scheme since its founding."
  • "We are encouraged by the recent regulatory developments concerning the company."

So, Shane, why leave now - when it looks like Pershing is just about to potentially cross the finish line?

Being a bear on Herbalife - as guys like Herb Greenberg and Matt Stewart know - puts you in the brutal crosshairs of a rabid group of longs that think you're "out to ruin the company" or "steal their money". Meanwhile, they don't realize that they're defending a company that is, in fact, "ruining itself" and "actually stealing people's money".

The only fact here is that Herbalife bulls and longs seem to have an aversion from the truth - whether it comes from Ackman, guys like Herb Greenberg, or SA contributors like Matt Stewart and myself. Some things in this situation aren't debatable - in other words, there's no grey area as to what the SEC has set forth as a pyramid scheme, and there's no doubt that Herbalife fits these seven criteria - so what is there to argue about? Instead of arguing the facts and simply providing the public with numbers that could exonerate the company, Herbalife went after Ackman's client list. I remember the anchors on Bloomberg the day this was reported were simply dumbfounded by the company's action. There's no doubt that it was reported yesterday, albeit from an unnamed source, that a Canadian regulator was probing Herbalife. Yet, longs decide to attack the article's author, instead.

Dinneen, no doubt, was probably subjected to the same type of harassment. If I were a betting man on why he left, my instincts tell me that he just may have simply been tired of the constant attention - after all, the case of Herbalife has become one of the most publicly battled stock situations I've seen in many years.

I also want to make it very clear that I understand that there are distributors and Herbalife employees out there that are good-hearted, good-natured people, trying to simply work for a living. My bear case doesn't revolve around anything personal with the low level Herbalife participants - it's with the business model and the top level executives. The last thing any ethical short wants to do is take money or work from someone with a good heart who thinks they're doing the right thing by pushing Herbalife products or recruiting. But, in this case, if the company doesn't make massive fundamental changes to how it does business, it's going to wind up harming far more people than it helps.

You have enemies? Good. That means you've stood up for something, sometime in your life.

-Winston Churchill

Rather than see this pushback as a stressor, I've been using it as sure-fire proof that somehow, somewhere, I'm touching a nerve with someone. The harder the pushback gets, the more ad hominem attacks I endure for my stance on the company, the more I continue to think the bears are really on to something.

I'd encourage bears to think this way - resistance to the obvious bearish argument could be a product of being on to the truth here. For the same reasons that Dinneen and Ackman covered in their original thesis, I still contend that Herbalife holds long-term risk for loss. As such, I remain bearish on the company for the long term.

In my opinion, Shane Dinneen, who produced a ton of great work on Herbalife, helped introduce the company criticism to the public and opened the eyes of bears like myself, will get his validation in the coming year.

Good luck and godspeed, Shane.

Source: Herbalife & The Curious Case Of Shane Dinneen