Shares of Herbalife Ltd.(NYSE:HLF) began showing life on Friday after a brutal week of selling.
The company announced and then disclosed through an 8K filing that it had entered into an agreement with Merrill Lynch International to repurchase $427.9 million of Herbalife's common shares as part of the Company's previously announced share repurchase program. Shares that are repurchased will be retired.
Under the terms of the repurchase agreement, Herbalife will pay $427.9 million on May 4, 2012 from the Company's cash on hand and from borrowings under the Company's senior secured revolving credit facility. The transaction is expected to be completed by no later than July 2012.
Earlier in the week shares had imploded following some very steady growth since the start of the year. Investors sold off stock in the nutrition and weight loss company following a series of questions from David Einhorn during a conference call regarding why the company did not disclose its breakdown of different kinds of distributors in its last regulatory filing.
Apparently, Herbalife had stopped disclosing how many of its salespeople solely make their money from a recruitment model similar to the one used by Avon in which "salespeople" can also make money recruiting others to sell Herbalife products. This was something the company traditionally told investors, but during the conference call, the company's CEO responded that he and the other executives didn't think it was a valuable metric.
Interestingly, after the call, the company disclosed on its website that its percentage of salespeople who were recruiters had dropped to 12%. That number was in the 20s a few years ago according to CNN Money. Skeptical investors began to jump ship and just when speculators who kept buying shares all the way down thought the bleeding was done, things seemed to only get worse one day after another. By Thursday evening, shares had lost nearly 25% of their value.
For the past five quarters, the company has seen double-digit year-over-year percentage revenue growth and analysts do see a more positive outlook about the company's expected financial results, so this could be a set-up for a good trade-- but only if shares move past levels of a key resistance in the $51 range.
The stock buy-back should help do what it is designed to do: Spur more buying at these levels. In addition, given the hunger for "weight-loss stocks" seen in the market these days, some of the traction lost during the past few days may also help the stock catch on with speculators who may see this as good bottom bounce buying opportunity. Put this on your watchlist to see how shares react.
Herbalife was founded in February 1980 by Mark Hughes with a mission to change people's lives by providing the best business opportunity in direct selling and the best nutrition and weight management products in the world.
While we do not see any upcoming catalysts or milestones on our FDA catalyst calendar, the firm is currently engaged in conducting clinical studies to investigate different aspects of nutrition.
Those clinical studies include: 1) a controlled trial of protein enrichment of meal replacements for weight reduction and retention of lean body mass; 2) increased protein intake using protein-enriched meal replacements compared to conventional protein intake and meal replacements in overweight subjects; 3) efficacy of low-calorie, partial meal replacement diet plans on weight and abdominal fat in obese subjects with metabolic syndrome: a double-blind, randomized controlled trial of two diet plans - one high in protein and one nutritionally balanced; and 4) arginine and antioxidant supplement on performance in elderly male cyclists: a randomized controlled trial.
One analyst thinks the stock has become a screaming buy. In a research note published after the conference call, Timothy Ramey, an analyst at D.A. Davidson, said the selloff in Herbalife shares has created "a major buying opportunity." If his screams are based on valuation, he might have a point. We're watchlisting and watching the trading closely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.