The Business Sense Behind The Bullish Investors In Herbalife

Includes: HLF
by: Dan Betz

For some people, the compelling reason to own Herbalife (NYSE:HLF) this past year is the dominance of business sense that lies behind the many high profile professional investors in the company. This idea is not without merit following the line of reasoning that a highly successful professional investor is only going to buy good companies with solid business fundamentals; and they would not own a stock that was not a good money making idea. However, that assumption can be flawed for several reasons.

The big one is simply this, they can be wrong! Shocking I know; but this really is not the main reason not to follow a professional. I think the main thing to realize is that regardless of their public announcements, if any exist, we really have no way of knowing the professionals true goals or the specific dynamics of their business, and life in general. So, given that the professional investor's life and business is in a continual flux of some sort, (as is everyone's) and that we are blind to this highly personal knowledge, we don't know when they will change their direction. The point is simply that the stability of a professional investor's positions can't be known with certainty.

The above point notwithstanding that should not prevent us from using the professionals ideas as the starting point for making our own inquiry and thus determine if the specific investment would be a good fit for our goals.

Which brings me to Herbalife as an investment idea; truthfully, it's an idea I had not considered until the televised argument in January 2013 between billionaire hedge-fund activists Carl Icahn and Bill Ackman.

Mr. Icahn's argument and the numerous other big money investors long this stock, makes for a simple, logical and tempting investment idea--just jump in and go for the ride; however, as mentioned above, you don't know when the big dogs will exit. Therefore, before investing in this seemingly pre-packaged idea, the prudent thing to do is to take a deeper look into the business sense behind the bullish investors in Herbalife. Accordingly, here are my "Fourteen Good Reasons to Buy Herbalife."

Fourteen Good Reasons to Buy Herbalife (HLF) Stock

  1. Current Earnings: Herbalife's current earnings report for the fourth quarter of 2013 beat estimates and shows a year over year growth of 15%(non-adjusted). The company reports adjusted earnings of $1.28/share. This is higher than analysts' expectations of $1.25 a share. And revenue was reported to be $1.27Billion up from $1.06Billion reported in 4th qtr 2012, an increase of 20%. Company earnings guidance for 2014 is $5.85-$6.05/share above analysts expectations of $5.87/share.
  2. Earnings Growth: Earnings per share have shown significant increase in past five years. "Herbalife has a five-year earnings growth rate of 25.1%." Company expansion plans confirm this trend: For example, construction on Herbalife Ltd.'s $100 million manufacturing and distribution hub in Winston-Salem is in progress and the plant should reach full capacity by July 2014. "The company's consistent growth in the past 10 years alone, the company has grown over 270 percent, from 2003 net sales of US$1.1 billion to $4.1 billion in 2012, and the company expects its growth to continue."7 This has presented the company with the opportunity to upgrade their IT infrastructure as well.
  3. Stock Buy Back: Herbalife has a plan to buy back $1.5 billion worth of its shares.
  4. Industry Leader: Herbalife is a global nutrition company with net sales of $4.1 billion in 2012; they have a strong position.
  5. Institutional Sponsorship: Over ninety six percent (96%) of Outstanding Shares are owned by Institutions.
  6. Market Potential: The Global Nutrition Market is estimated to be over $400 Billion in 2014. (*Source: The Nutrition Business Journal (NYSEMKT:NBJ)) Herbalife only has 1% share of this global market; there's huge growth potential.
  7. Catalyst: The big name investors who went long: Carl Icahn, George Soros, and Bill Stiritz. Conversely, no big name investors have taken in with Pershing Square and sold short a significant position.
  8. Legal Business Structure: The FTC is not likely to take action regarding Herbalife in the near term future.
  9. Trend: The Herbalife 200 DMA trend is up. And the distribution days of late have below average trading volume.
  10. DIV Yield: 1.8%
  11. Expect Herbalife to be the winner in their battle with Pershing Square. Here's why: Big time support: Carl Icahn, George Soros, >Ten Major Institutions, and William Stiritz, CEO of Post Holdings Inc. (You probably know them from the boxed cereal in your cupboard, like Raisin Bran.)
  12. Analysts Opinion: Over eighty (80%) percent of stock analysts rate it a buy.
  13. A super focused management team: Adversity makes you focus and become stronger, if handled correctly; and Herbalife management has fought back strenuously against Pershing Squares' accusations and they've taken smart actions to successfully push back against Pershing Square in 2013.
  14. The stock is cheap at under fifteen times earnings, with forward P/E under 12 and net sales over four billion dollars per year.12

Given the above fourteen points, I believe Herbalife should regain the $80 mark soon; and, if a flurry of short sellers cover, they will probably drive the stock over $100. With short percentage of the float sitting at 29.20% and the Bill Stiritz investment card, that's a real possibility.

Con: Pershing Square and Mr. Ackman know something the big name investors mentioned in this article and the rest of us don't know and he wins his way.

Caveat Emptor: Take a page from the playbook of the big dogs. Even though Mr. Ackman and Mr. Icahn invested huge sums of money, as compared to their entire portfolio, their stake in HLF is relatively small. In addition, they most likely have options contracts as hedges and an exit plan in place to protect themselves. Be sure you do the same; always play good defense to preserve your capital as all stock market investing is risky. If you can't tolerate risk, this investment is not for you.

Disclosure: I am long 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.