Herbalife: One Down Day And The Big Picture

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 |  Includes: HLF
by: Rogier van Vlissingen

Summary

One swallow does not a summer make.

A regulatory quagmire.

The symptoms and the disease.

Herbalife (NYSE:HLF) had a challenging day yesterday, $3.13 down (4.84%), with volume at double the three-month trailing average. So, what's the news?

HLF News Items (July 16th, 2014)

  1. NY Post reports Bill Ackman's imminent report on nutrition clubs. Is that news? We knew for a while it was coming.
  2. Carl Icahn issues a backward-looking statement, he has not sold a share of HLF yet, and he's also still in profit
  3. Bill Ackman teases Icahn in a kiss and make-up display on CNBC that he'd love to help him out of his HLF position. This would be a forward-looking statement.
  4. New complaints to the Illinois AG filed ahead of the Herbalife extravaganza, with support of the Illinois Hispanic Chamber of Commerce and LULAC of Waukegan.
  5. Ken Moelis makes vague supportive comments on CNBC.
  6. New records were set for HLF options, with a 1.01 put/call ratio, suggesting again a bearish sentiment.

In other words, 1) is bearish, but old news, except Bill Ackman is not yielding, so that's more old news, except the urgency goes up with the presentation due next week. 2) Is self-congratulatory but old news, and does not commit Icahn one way or another. Its significance is in the eye of the beholder, bullish or bearish, but probably bearish. 3) Is not new news, except for the observations in 1), and 4) is not new news either, except for the timing, but a few more complaints added to the list absent specifics barely qualifies as news. The public support of the Illinois Hispanic Chamber of Commerce may be new, LULAC is not, except that many chapters have accepted donations from Herbalife, but apparently not all of them. 5) Is probably neutral, it was a self-justification by Ken Moelis, not news, and 6) is bearish.

Evidently, the market took this confluence of tidbits as bearish news, and the biggest item may be the realization that Icahn can still get out with a profit (how you do it is another matter, but he's got new friends).

Any substantive change?

Not much, for we don't know any specifics about any of the pending investigations, except some reading of tea leaves from recent enforcement actions, and the BurnLounge case, which is still being digested, but generally strengthens the hand of the FTC.

What about the earnings report?

Expectations are it will be good, and that does not mean much either, unless and until the fog lifts on these investigations. So I would tend to stick with my most objective valuation -- for those who can't make up their minds on the outcomes -- of a 50/50 chance between $90 and $0, which would leave it still overvalued at last night's close of $61.52

What does Seeking Alpha have to do with it?

For better or for worse, it seems Seeking Alpha has become an important repository of the information surrounding Herbalife, and every argument that could possibly be relevant in this matter has been tried on this site, either in articles or in some of the extensive comments. Some of the most relevant exchanges have been only in the comments. E. Robert Smith published his tell-all MLM whistleblower novel "Downline: ...intolerable potential to deceive" this year. Evidently, this was years in the making, but the timing of the release is certainly significant. It is not directly related to Herbalife in the narrow sense, but it frames the arguments better than is usually the case in the discussion of the extant case law. His position that it will take a congressional investigation is not an unlikely possibility.

The core deceit in all of MLM remains the business opportunity fraud of promoting unlimited earnings to unlimited people. Regulators and prosecutors are better informed today than they have been at any time in history.

Summary

We are definitely watching history in the making, and the relatively strong reaction of the stock to a few vaguely bearish news items amidst the sea of bearish information betrays an underlying bearish sentiment. A rational attempt at valuation considering the uncertainties suggests $45 is more reasonable than the current $60+.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.