The Financial Times article on Friday claiming Herbalife was under investigation by the FBI and the Department of Justice was the main reason for the pressure on the stock.
Given that Carl Icahn knows the company much better than Bill Ackman, the benefit goes to Icahn.
And unless the company proves to be a complete scam, the correction is a buying opportunity.
As reported by the Financial Times late Friday, Herbalife (NYSE:HLF) is being investigated by both the U.S. Department of Justice and the FBI. The Financial Times attributed the report to "people familiar with the matter." And while "people familiar with matter" simply means people who would not go on record saying anything about the matter, it also means that unless we get something more official, we can't really tell what's going on.
Herbalife put out press release stating that:
We have no knowledge of any ongoing investigation by the DOJ or the FBI, and we have not received any formal nor informal request for information from either agency. We take our public disclosure obligations very seriously. Herbalife does not intend to make any additional comments regarding this matter unless and until there are material developments.
For the time being we have to give the benefit of a doubt to the company, until we get something more official. But the truth of the matter is that where there is smoke there is fire. And the fire might not be just the leaked Financial Times story, but a host of other things also.
We are all witnessing stocks falling like a rock these days. Herbalife's drop might be just another case of speculative mania taking its course (to the down side). Let's have a look at some of the metrics of the stock.
Herbalife is currently trading at a trailing P/E of about 10.5, with a forward P/E of about 7 and a Price/Sales ratio of 1.26. As per me, myself and I, I don't see a bubble here. Even when the stock was trading near the 80's, before correcting to $52 a share on Friday, the stock was really not very expensive and nowhere near bubble metrics.
In fact being a little suspicious as I am, Herbalife should have not corrected this much. I mean a 10%-15% correction, given the current state of the market, could be considered normal, but something suspicious is going on when you see a relatively cheap stock selling off this much.
And then we have the issue of the battle of the Titans. On the one hand we have Bill Ackman who has been short the stock for a while now, who is (or as) losing his shirt, and on the other we have legendary investor Carl Icahn.
Carl Icahn is very involved with the company, and a lot more involved than Bill Ackman is. Carl Icahn currently has 5 members on the company's board, and I think he has had more than enough time to investigate the company in detail to come to his conclusion.
And if he thought the company was a scam, as Bill Ackman says, he would have probably sold by now. So irrespective if Herbalife is a scam or not, Icahn thinks it is not. And because Icahn knows the company in more detail than Ackman knows it, I have to give the benefit of a doubt to Carl Icahn.
However, when the market hears key words like "FBI" and the "Department of Justice", it sells first and asks questions later. So unless Carl Icahn is very wrong about Herbalife, logic dictates (investment logic that is), that the Financial Times article that has exerted pressure on the stock on Friday is probably a buying opportunity.
As for who is right and who will have the last laugh, meaning Bill Ackman or Carl Icahn, I think we will find out soon enough, because while the Financial Times article is still not confirmed, I doubt they would write something like that if their information was not 100% confirmed.
As for me, and given the metrics of the stock (and unless the whole company is a fraud), I think the dive is a buying opportunity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.