This morning we learned through a 13D/A filing that Bill Stiritz increased his active stake in Herbalife (HLF) to 7.39% or 7,484,804 shares worth over $480 million. For those of you not familiar with Mr. Stiritz, he is the Chairman and Chief Executive Officer of Post Holdings (POST) and also serves as President of Westgate Equity Partners, L.P. The 13D/A filing is interesting because it states the following:
The Reporting Person's views, advice and counsel may address a wide variety of matters, including ways to further leverage the Company's strong distribution system, potential financing and/or recapitalization strategies, potential stock repurchase programs, and potential strategies for confronting the speculative short position that currently exists in the Company's stock and its attendant negative publicity campaign.
This development follows news from Monday that Tim Ramey left his position as an analyst for DA Davidson. For those of you not familiar with Ramey, after he labeled Herbalife one of his five best stocks for 2013, shares rose 139%. Ramey followed this up by labeling Herbalife his single best investment idea for 2014. In a letter obtained by CNBC, Ramey wrote that he was leaving DA Davidson to pursue
…some consulting on strategy, M&A, and corporate development for a significant company, working with executives where I have had a long and productive relationship.
By Monday evening, the Wall Street Journal reported that the significant company was Post Holdings, and that Tim Ramey was taking a position with Post Holdings to work on strategy and corporate development and reporting to Mr. Stiritz.
These Are Significant Developments for the Bulls
Make no mistake that these are compelling developments for the Herbalife bulls. The thesis of the bulls has continued to be that Herbalife is a legal multi-level marketing business with a compelling fundamental story and further that the involvement of activist investors on the long side will be a catalyst for shareholders as their involvement could lead to a leveraged buyout (LBO), a Dutch auction of a portion of Herbalife's float, or a significant share buyback program, all of which could cause a massive short-squeeze. This week's news goes a long way toward foreshadowing just such an outcome for Herbalife investors:
- Mr. Stiritz 13D/A filing discloses a significant increase in his stake in Herbalife
- Mr. Stiritz 13D/A filing specifically mentions confronting the speculative short position
- Mr. Stiritz 13D/A filing specifically mentions financing and recapitalization strategies
- Mr. Stiritz 13D/A filing specifically mentions a stock repurchase program
- Tim Ramey's resignation letter specifically mentions working on Mergers and Acquisitions
As mentioned earlier, Mr. Stiritz is the President of Westgate Equity Partners, LP. One of Westgate's investment strategies is:
Refinancing or recapitalization of operating entities where management has a demonstrated track record of success
Does this sound familiar? It should, as it is exactly what Mr. Stiritz said he intends to do with Herbalife in his 13D/A.
Note: Westgate specializes in Real Estate, so I am not suggesting that they are likely to be involved in a Herbalife LBO, only pointing out that Mr. Stiritz has a history of this activity (outside of Post Holdings) targeting companies that are executing.
Herbalife has a Track Record of Success and is Demonstrating Value
Herbalife management has been executing, beating analyst estimates for several consecutive quarters. The last two earnings beats were particularly impressive at 18% and 23% respectively. Additionally, when compared to the other stocks in its sector, Herbalife is demonstrating significant value:
Price to Sales
Price to Book
Numbers courtesy of TD Ameritrade
When examining the above numbers, Herbalife's PEG Ratio or Price/Earnings to Growth Ratio of 0.58x stands out as it is the lowest in the personal products sector and the lower the PEG ratio, the more undervalued the stock.
In addition, if you apply the sector average multiple to Herbalife, you find out just how undervalued Herbalife is at its current price.
- Industry average multiple: 26.88 x Herbalife EPS 4.73 = Share Price of $127.14, which is a 94% share price appreciation from today's levels.
Even if you apply a 20% discount to the multiple, you end up with a price target of $101.71, which is a 55% share price appreciation from today's levels
Taking all of this into consideration, it is easy to see why Mr. Stiritz sees Herbalife as undervalued, and why these heavy hitters in the investment world have agreed with the value thesis and piled into the trade on the long side. Note: for illustrative purposes, only the more well-known longs are listed below.
% of HLF
Soros Fund Management, LLC.
Laurence D. Fink
Hayman Capital Management
Less than 1%
Less than 1%
This is a compelling list of investors who believe in Herbalife as a viable, if not cheap, investment opportunity.
Today's 13D/A disclosure by Bill Stiritz is significant and compelling for the bull case on Herbalife. Mr. Stiritz specifically mentions that he will confront the speculative short position through financing and recapitalization strategies and/or stock repurchase programs. This 13D/A filing increasing Mr. Stiritz stake combined with the fact that Mr. Stiritz has hired analyst Tim Ramey are bullish events for Herbalife investors, especially when you consider Tim Ramey's resignation letter where he specifically mentions that he will be working on Mergers & Acquisitions. Herbalife's fundamentals support the value proposition and the recent sell-off in shares have provided a buying opportunity for investors willing to fade the perceived risk caused by one short seller with massive "paper" losses.
One Additional Observation
A recent letter from Senator Edward Markey is largely why Herbalife's shares have sold off, presenting investors with this opportunity. John Hempton of Bronte Capital Management has provided some thought provoking context to this letter. Anyone considering the Herbalife saga should read Mr. Hempton's series of blog posts. You can find them here.
Additional disclosure: I am long HLF and I may initiate additional long positions in the next 72 hours.