The Whales Are Jumping The Herbalife Ship

| About: Herbalife Ltd. (HLF)

One of the main arguing points for going long Herbalife (NYSE:HLF) over the last year, since Bill Ackman announced his short position, was the involvement of many respectable names on the long side. Names like Icahn, Soros, Druckenmiller, Stiritz and Bass all lined up against Ackman. I heard this argument from absolutely anyone and everyone and I watched Stephanie Ruhle pelt Bill Ackman with questions about it after the Robin Hood conference. I was bewildered - why were these guys investing in such a risk-laden stock?

Simply to try and ride the squeeze? That's what it looks like it could have been.

Matt Stewart once asked, "Which Herbalife Long Will Blink First?"

Now, we know.

It's looking like we can officially count out Bass and Druckenmiller - Soros seems to be on his way out the door, if he isn't already and just hasn't filed.

Business Insider reported on Bass:

Kyle Bass' Hayman Capital just released its Q4 2013 13F - the SEC filing that discloses a hedge fund's long stock positions.

So let's see what Bass, who is mostly known for his macro calls, picked up (and dumped over the last quarter).

Hayman Capital dumped its entire stake of over 2.2 million Herbalife shares. The stock has been quite controversial since the end of 2012, when Pershing Square's Bill Ackman disclosed that he was shorting the stock to zero.

Reuters reported just this evening on the outpouring of whales and their corresponding statuses at the end of December 2013:

Soros' involvement was similarly critical at Herbalife, where the media quickly identified Soros and Carl Icahn, Herbalife's biggest backer with $16.9 million shares, as the industry's elder statesmen facing off against a younger rival, Ackman. The 47-year-old's Pershing Square Capital Management has a $1.16 billion short bet against Herbalife and is accusing the company of running an illegal pyramid scheme. The company denies that accusation.

Icahn kept his Herbalife holding steady, but Soros has now trimmed its stake to 3.2 million shares from 5 million shares.

The family foundation of Soros' former lieutenant, Stanley Druckenmiller, no longer listed Herbalife on its filing, after having had held 79,032 shares at the end of the third quarter.

Hayman's Bass, another closely followed manager, liquidated his firm's stake by selling 436,371 shares.

Other firms have take some money off the table. Tiger Consumer Management cut its position by 48 percent to 400,000 shares, while Adage Capital Partners cut its stake by 40 percent to 441,276 shares.

Soros was in the stock at an average price of around $42 - he made good money and has seen Bill Ackman and other shorts claim to want to take their trade to the "ends of the Earth." Soros has obviously seen the risks associated with Herbalife and potential regulator intervention. The headlines surrounding Herbalife in 2014 - with the exception of the buyback - have been anything but confidence inspiring.

Maybe everybody can have their cake and eat it, too - let the whales exit at a sizeable gain, I won't hold it against the old billionaires and Bass - and then Herbalife can self-destruct, either through regulator attention or in good ole' fashion "running out of people on the Earth for the pyramid scheme" style.

Of note, Soros additionally exited J.C. Penney - a move that Ackman has been criticized for over and over in the comments to my article. It's called cutting your losses, and Ackman beat Soros to the punch.

While I'm not saying that Icahn and Stiritz are definitely going to do the same, it's worth it to note that these guys acted in semi-unison when they entered into the stock. It wouldn't surprise me to see them start to all hit the exits at the same time.

Again, a lot has changed since the whales poured in:

  • Chinese media scrutiny after an investigation into MLM company Nu Skin
  • Canadian government investigating Herbalife's business model
  • A U.S. Senator and LULAC furiously urging the U.S. FTC to get involved.
  • If I had millions in Herbalife, my knees would be shaking a bit as well.

That's enough to give even the richest whales some shaky knees. These guys may have billions, but they'll keep every nickel they think they can. You don't become a billionaire by not taking profits.

I continue to contend that these moves could foreshadow a new page in the Herbalife story and that Herbalife holds major risk for potential loss. Short is the only long-term Herbalife trade that looks attractive to me and, as such, I continue to be long various puts.

Disclosure: I am short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.