Forget for a moment that Herbalife (NYSE:HLF) stock ran up monstrously today.
Forget the media's perception of how the event went based on the stock run up.
Forget the exposition and the somewhat lengthy presentation.
What I witnessed firsthand at the AXA Equitable Center in Manhattan today was one of the most powerful presentations Ackman has made yet. Buried in 3 hours of intense microscopic scrutiny of the company was about 30 minutes worth of extremely concentrated and powerful statements from Mr. Ackman that should petrify Herbalife bulls.
Some of you likely already know what I'm talking about. Some of you sold into the run up today. Others are basking in the hysteria of the panic buying. However, I believe that saner heads are going to prevail when the dust from this presentation settles.
The market may not have noticed, but Bill Ackman just blew the Herbalife story wide open today. And I'm betting the people that mattered -- namely sophisticated investors and regulators -- noticed. Ackman's style is systematic and thorough. Today, it included some obvious emotion and was heralded by the media as being a bit too longwinded.
However, that doesn't take away from the powerful information that was presented with regards to Herbalife's nutrition clubs.
The stock rallied today because Ackman made some sensationalist comments yesterday and failed to back them up with a sensationalist delivery of his core message. Investors like big headlines and admittedly, Ackman's delivery was slow and systematic today.
Having said that, it's irrelevant how he delivered the message and extremely relevant what message he delivered. Ergo, investors that need to be spoon fed their facts completely missed the point today. In QTR's opinion, it's evident through the squeeze put on the stock, and through the baseless hysteria and panic buying that occurred.
Bill Ackman presented a massive fundamental flaw in Herbalife's business plan, and the stock tacked on over a billion dollars in market cap because of it. And I thought I had seen it all after NQ Mobile's (NYSE:NQ) stock rallied after they fired their auditor.
I'm not going to rehash Bill's entire presentation, but I encourage you to check it out at herbalifepyramidscheme.com if you didn't view it live today. In between tons of exposition (some of which, admittedly, which was longwinded), Bill Ackman did just seem to expose a massive fundamental flaw behind Herbalife's business model.
Not only that, but Ackman made an entirely different and equally important short thesis behind the company. If regulators don't shut the company down, Ackman has offered us today what is seemingly another method in which the company could implode. This is especially important for those that take the long view on the company assuming that regulators - yes, all 7 of them (SEC, FTC, FBI, DOJ, 2 AGs, Canada) - are not going to have the testicular fortitude to step in and shut the company down.
Say that's true, and the regulators exonerate the company (unlikely, in my opinion). We still have this nutrition club mess to clean up.
For starters, how about the internal documents that actually refer to the company as a pyramid? Ackman disclosed internal Herbalife strategy documents that actually refer to the bottom of the pyramid as "the bottom of the pyramid," So, in Herbalife's own words, the company is a pyramid. Hilarious.
Now, onto nutrition clubs. Follow my logic here:
Ackman's claims in his presentation today that Herbalife's revenue is made up of between 30% and 40% nutrition club sales are important. These are company-derived figures.
We know that nutrition clubs are the primary driver of growth in the company. We know that 9 out of 10 that don't complete Herbalife's Nutrition Club "education" do not operate. We know that Herbalife's idea of an education is seemingly to force feed potential nutrition club owners product.
The product is being consumed because Herbalife has made that a step in the training process. Ackman claims it's a fundamental Enron-like fraud because the people consuming in these clubs are anything but retail customers -- they're potential distributors trying to be part of the 0.001% at the top of the pyramid.
He's arguing that it's smoke and mirrors at these clubs. And from the looks of his presentation today, it is.
It was all right there -- in order to graduate, you must make a daily habit of going to nutrition clubs and consuming the product -- whether or not you're concerned with weight loss, whether or not you feel like it on a particular day. It's your de facto job as a nutrition club founder; except it's not really a job.
Nutrition clubs make up a massive amount of Herbalife's revenue. That revenue is a product of distributors consuming each other's product as part of an Herbalife training program. Ergo, Ackman's argument states, if nutrition clubs face a crackdown, the company regresses financially in a massive way.
I can't speak for the rest of the world bidding up the stock today, but it sure makes a hell of a lot of sense to me.
This is significantly more important that people are noticing, in my opinion. The reasoning behind that is that this is an entirely new outlet in which the company could face turmoil. It is, in essentia, an entirely different and completely valid short thesis that would stand alone on its own; let alone with the facts that have already been disclosed.
The others, of course, having to do with the false income claims, false medical claims, and pyramidal structure of the company's fundamental business model. Oh yeah, and pesky items like current Board members flushing their fiduciaries down the toilet and leading uneducated marks to believe they can earn $100k/month.
Although it slipped under the radar -- for now -- this message was delivered loud and clear to me today. I continue to believe that it's only a matter of time until Herbalife collapses -- whether it's under its own weight, or at the hand of a regulatory agency.
The case of Herbalife is not one of a sprint. This isn't about what the stock price is at today, it's about what the long-term result of shining light on every aspect of the business plan is going to do to the company.
So, bulls, enjoy your day. Admittedly, your gains are my paper loss today.
The market didn't notice today, but they can't ignore the facts forever. I will continue to hold and add to my short as funds become available. Regulators now have more than ample rope to hang the company -- and I believe they will.
Time is on the side of the shorts and regulatory action is more likely now than it's ever been, in this investor's opinion.
Disclosure: The author is short HLF. 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.