I think anything is possible this afternoon with Herbalife's (NYSE:HLF) earnings. I think we're just as likely to get the numbers as we are to get a potentially material disclosure to the long or the short side. Perhaps Mr. Icahn will disclose he was the one adding shares during Mr. Ackman's presentation? Perhaps the company will "officially" disclose other regulatory probes? Who knows.
The numbers are meaningless in this situation if you're a short. They're meaningless because the short thesis relies on the fact that the means in which the company's numbers have been generated is intrinsically fraudulent. Maybe the company will beat estimates yet again? Will that change how the company has arrived at those numbers? No.
What QTR is expecting is volatility. If not simply based on the numbers, based on other metrics or information that Herbalife may have been waiting for today to share with the market. No matter what side of the trade you're on, you have to acknowledge that there's some chance of major upside or downside in the coming trading week for Herbalife.
And, like Mr. Ackman, I pride myself on "managing my position prudently", so I've taken my position (which is, and continues to be 100% in puts) and added some OTM calls to reduce short-term risk. My position, going into earnings, is weighted about 3:1 puts to calls. These calls can come in useful, should Herbalife pop to the upside for the short term. They'll provide some protecting for my calls and allow for fresh powder should I want to realize their gains and press them back into my long-term short. And, make no mistake, barring anything aside from a full governmental exoneration, I'm going to remain short for the long-term.
I in no way change how I feel about Herbalife for the long run. I continue to believe that the company is a worldwide confidence game - even more so since Mr. Ackman's presentation this past week - but, long-term theses can't protect from short-term paper losses.
Since Mr. Ackman's presentation, Herbalife has felt it necessary to go out and leverage a former high ranking government official in Mr. Hoffman, who they're bringing on for a new position with a title that basically means, "guy we hope will keep us out of trouble with the regulators". As Herb Greenberg continues to ask, "why does the company need to do this if they're acting legally?" and "why is there this incredible cloak of uncertainty around MLM companies?"
It's likely because longs and shorts both know the same thing - these companies are dancing around, if not crossing, the lines of legality. We all know, from a realistic standpoint, that these companies could be exonerated as easily as they could be shut down. And none of us have a crystal ball as to how motivated the regulators are going to be. Shorts think "saner heads will prevail" and longs are basing their bets on phrases like John Hempton's "they're scumbags, but they're the stock market's scumbags."
Still has a nice ring to it.
Shorts took a hit this past week, despite Mr. Ackman delivering demonstrable proof that much of the company's "retail" sales seem to be almost entirely fake, for lack of a better word.
This is no doubt a marathon, not a sprint, with Herbalife. Much of Mr. Ackman's original goal of simply getting regulators to look at the company has already been accomplished. The rate at which these regulators move, no one has control over - including Mr. Ackman. However, what we tax payers depend on is that they take their time, decide based on facts, and most importantly get it right. Shorts are looking for a little bravery and a little non-pandering from the government organizations that are set to protect all Americans.
Again, shorts took a paper hit this past week and we may take one again today after earnings, who knows. This was a stock that once traded at $83 whose "fair value" if it wasn't a complete fraud would likely be closer to $110. But, again, it ain't about how hard you hit, it's about how hard you can get hit and keep moving forward.
My trade today is solely for the purpose of protection, in case shorts do get hit post-earnings. I want to be able to continue on the short side of this trade for the coming months, and I'm positioning myself accordingly.
I continue to believe that Herbalife is a global confidence game, and the quicker regulators shut it down, the better.
Let me tell you something you already know. The world ain't all sunshine and rainbows. It's a very mean and nasty place, and I don't care how tough you are, it will beat you to your knees and keep you there permanently if you let it. You, me, or nobody is gonna hit as hard as life. But it ain't about how hard you hit. It's about how hard you can get hit and keep moving forward; how much you can take and keep moving forward. That's how winning is done! Now, if you know what you're worth, then go out and get what you're worth. But you gotta be willing to take the hits, and not pointing fingers saying you ain't where you wanna be because of him, or her, or anybody. Cowards do that and that ain't you. You're better than that!
- Rocky Balboa
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.
Additional disclosure: The author is long both puts and calls, at about a 3:1 ratio. Post-earnings, the author plans on selling his calls (in the event of good news) and piling some of that powder back into (what will then be cheaper) puts. I remain extremely bearish on Herbalife for the long-term.