The Witch Is Dead. Did Bill Ackman Use Reverse Psychology On Herbalife?

Aug. 6.14 | About: Herbalife Ltd. (HLF)

Summary

Ackman gave an anti-Herbalife presentation that jumped the shark.

Following the presentation, Herbalife had its biggest one-day rally.

Herbalife is hitting fresh 52 week lows now. Can’t blame Ackman anymore.

Herbalife is hitting fresh 52 week lows now. Can't blame Ackman anymore.

Herbalife (NYSE:HLF) has lost its witch. Now it must face the harsh reality of its declining fundamentals.

Cultural anthropologists will tell you that the myth of the existence of an evil witch in communities was important back in the day. There would be some problem creating great stress in a town or a village.

Maybe it was a really bad storm. Maybe it was a fire. Maybe it was a drought. The people would decide to blame the problem on a witch. That witch would cause the people to get together, unite, burn the witch at the stake, and in the minds of the people the problem was solved. They were able to move on.

Now if the storms, fire, or drought continued and the people didn't have their witch - even more stress would result because they no longer could blame their problems on an evil magical force that they could fix over a 3 hour trial and execution.

That brings us to Bill Ackman's 3 hour presentation. He overhyped it. He knows that. He even said, "My bad." Love him or hate him, Ackman is no dummy. He "had" to know that this wasn't the most daunting pile of data he had yet against Herbalife. I thought it had a lot of good info, but it wasn't nearly as shocking as some of his earlier pieces. He had to have known this.

Perhaps his goal was to execute himself, I have to wonder. Longs and the company especially have been demonizing Ackman for the better part of two years. The "cheap" stock price has largely been blamed on Ackman and his "misinformation campaign." Herbalife executives rant against him in press releases, interviews, conference calls, and even SEC filings. They even go so far as to give adjusted earnings and guidance that exclude millions and millions of marketing dollars responding to Ackman.

Ackman may have shot himself in the foot with the pregame hype. The market responded. Longs were dancing in the street, celebrating Ackman's supposed credibility crushing and declaring victory. In a classic case of be careful what you wish for, now it's hard to blame Ackman for Herbalife's "cheap" stock price.

Who knows, Ackman may have killed his own witch on purpose. The guy is a brilliant chess player. Notice how this whole thing went down just before earnings.

With the disappointing earnings report, Herbalife proceeded to give back all of its "Ackman rally gains" and then some. In fact, Herbalife has been printing new 52 week lows all day as I write this (August 5, 2014). Herbalife shareholders and management can't get away with blaming Ackman anymore. That witch is dead, remember? If CEO Michael Johnson got on CNBC and badmouthed Ackman for the zillionth time, his words at this time would fall on deaf ears.

With a P/E still over 10 and the possibility of declining earnings in the quarters/years ahead, it's hard to imagine that there is any regulatory risk at all priced in. I believe that for a long time the anti-Ackman rallying crowd was brilliant and worked wonderfully to divert attention away from Herbalife's true problems. Ackman for most of the time was probably actually helping lift the stock price - not hurt it.

With reality setting in and the Salem Ackman Trials largely over, I expect the very real regulatory risks to continue to get priced into the stock with another leg down, maybe 50% of the current price until the outcomes of the investigations are known and/or until the real fundamental picture changes either for better or for worse. In short, Herbalife is a strong sell for now.

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.