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Summary

  • Herbalife's convertible bond shows how risky the bond market thinks the company is.
  • Herbalife insiders have been buying stock last week into this week.
  • I contend these actions are futile, and that this is a sign of running out of ideas.

Today, I spent much of the day basking in the glow of Herbalife's (NYSE:HLF) convertible bond yield to maturity, which Matt Stewart called me to point out has now nearly tripled since their initial writing. The bond market is starting to think there's a real risk in Herbalife not being able to meet their debt covenants one way or another.

One of the points we talked about was how tough it's going to be for the company to refinance its debt with the way the bonds are currently priced. It's going to expensive to refinance in the same way it's going to be expensive to borrow money for an LBO of the company, should Mr. Icahn lose his mind completely and go down that route with other investors. Now that the price is dipping, the longs are starting the LBO chatter yet again - but, I doubt Mr. Icahn would take such a risk at this point.

I really do hope he can get out at a profit before this gets worse.

Anyways, Matt and I also chatted about how the raise in interest rates could negatively effect the company's cash flow going forward. All hypothetical scenarios, but scenarios I run over on a daily basis, nonetheless.

Last week, Charlie Gasparino did one of the best jobs reporting on Herbalife that I've seen him do since the saga broke. He had Herbalife CFO John DeSimone on his program and, instead of lobbing him cream puffs, he confronted Mr. DeSimone about the insider selling in the company and the poor quarterly results that Herbalife had posted. DeSimone, defending himself and his company assured Mr. Gasparino that the "spate of insider selling is over" - and sure enough, last week and this week, we were treated to nominal insider buying from the executives at Herbalife.

These buys have barely moved the needle and done little to impress investors at this stage in the game. Herbalife saw a couple ticks up in after hours trading on all of the days the buys were disclosed, but opened up trading with a landslide almost every single day dating back to the beginning of last week.

This is what the last six days of trading looks like.

(click to enlarge)

That's a 25%+ haircut in just six trading days. Obviously, the market hasn't been amused with the company's financials, how they're reporting their Venezuelan assets, the non-GAAP earnings, the Club 100 saga, and all of the other happy horsestuff that's been cloaking this company for the last couple of months.

Nonetheless, I've been asked by many people over the last couple of days whether or not the insider buys mean much at this point. I contend they don't, for these simple reasons.

1. It Kind of Means Nothing Material Is Occurring Behind the Scenes

Simply put, if Herbalife was having a materially excellent quarter or sitting on some kind of great news these last couple weeks, they wouldn't legally be allowed to buy stock. So, these buys act as a reverse smoke detector for me - they show me that this week and last, there doesn't seem to be anything materially good or bad on the table over at Herbalife internally.

Which then leads me to believe...

2. It's a Defense Move

Herbalife is running out of moves.

The PR campaign doesn't seem to be working anymore and the fundamentals sure as hell didn't look real pretty in the last financial report. So, what now? Let's buy some stock - after all, it's all or nothing at this point for the company. Plus, it looks like a good defense in a deposition years from now - "I didn't know it was a scam - look, I even bought stock!"

Executives often buy stock when they're under scrutiny from short sellers or after they post a poor quarter - they do it to try and send a message to the market that "if it's good enough for the goose, it's good enough for the gander". In this case, these buys seem to be nothing but a direct defense move to the criticism that Mr. Gasparino lopped on the company for insider selling.

I find it hilarious that Mr. Ackman and other shorts have been pointing out the insider selling going on for the past couple of years - hell, it was #1 in my "24 Ways that Herbalife is Mocking the Regulators" article - but the company finally responds violently to when Mr. Gasparino, often seen as an ally, has the stones to raise the point.

Kudos to Mr. Gasparino, again.

3. It's a Negligible Amount of Money

These are what's known as "token buys" - a couple hundred grand here and there is nothing to these executives who have no doubt already made their fortunes off the backs of those who are making very little money from being distributors.

Ultimately, the amount of money involved here isn't going to make a material difference for any of these executives.

Further, Michael O. Johnson, who has cashed out the most, has not been one of the buyers in the last two weeks. As a matter of fact, Mr. Johnson has been out of the limelight altogether, as the rest of the C level suite has been the boots on the ground defending the company.

(click to enlarge)

Conclusion

Regardless, at $49, this stock is still not priced according to the regulator risk and to how future interest rates could effect the company's debt. Like Mr. Stewart said in his last piece, a fair price for this stock is somewhere around the $30 level with the regulatory inquiries in the background. When and if the FTC or another agency comes out and makes Herbalife change material items about their business (or shuts them down), the stock could potentially be worth significantly lower than $10.

I'm not "buying" the insider buying for the time being. I remain short Herbalife through holding vanilla puts and continue to contend that regulators need to clamp down on this company.

Best of luck to all investors.

Source: Herbalife Insiders Are Buying, But I'm Not Buying It