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  • Herbalife Short Attack: History Repeats Itself. 1 comment
    Aug 29, 2012 7:01 AM | about stocks: HLF

    When Herbalife's (NYSE:HLF) stock began plunging lower on May 1st of this year, I couldn't understand why a good company, that had just reported a great 1st quarter, was under attack based on the information being reported, but now I do. It was the perfect time for shorts to profit by creating doubt about the management of the company as well as the value of its stock. The stock had just reached an all time high (April 23, 2012- $73.00) and had a very high PE. Also, it had been a long enough ago time period for most investors to forget or not know about the last short attack of Herbalife which began back in 2008, lasted into 2009, and which basically tried to bring up many of the same concerns as those being raised by the shorts today.

    The Herbalife 2008 short attack involved a different cast of characters from the current short attack, and included a known convict, Barry Minkow, as the main player. He was known to have a very bad reputation and openly admitted he was a liar and a thief per this June 4, 2008 Los Angeles Times article "It's Barry Minkow vs. Herbalife" including the following excerpts-

    ""Why am I good at what I do? I'm a liar and a thief," said Minkow"

    " Shorting the stock is his way of financing his ongoing probe into the company, he said."

    "You may remember Barry Minkow as the young San Fernando Valley entrepreneur who was convicted of defrauding investors of millions of dollars in his ZZZZ Best carpet-cleaning company."

    The 2008 short attack, which I discuss in more detail later in this article, lasted several months and into 2009. All accusations were proven to be wrong with Herbalife continuing to grow, and with Herbalife's stock fully recovering its prior share price and beyond.

    The current characters are different than the 2008 short attack with David Einhorn being the person that set off the short attack with his innocuous questions on a conference call. He knows a lot about fooling people too since he wrote a book about it, "Fooling Some of the People All of the Time: A Long, Short Story". I prefer another way to look at it- "You can fool some of the people some of the time, but you can't fool all the people all the time". If you want to be one of the people not fooled by these characters, you will read this entire article and view the information from each of the links I have provided.

    I have seen these tactics by shorts of trying to fool people and to get longs to sell their shares at low prices many times before. I have my thoughts about what to do to battle them but I think it's much better that I just let you hear what Jim Cramer of CNBC's Mad Money told his viewers and Michael Johnson, CEO of Herbalife about how to handle Herbalife's short problem back in 2009 during his show. (Did I say 2009?- YES)

    (Click here for full video of Cramer and Johnson on 2009 CNBC Mad Money show)

    Below are excerpts of Cramer talking about the 2008/2009 short attack of Herbalife during the first 2 minutes and 20 seconds of the above 2009 video-

    "This is one of those stocks that has been dogged unfairly by rumors from the shorts about (that's the short sellers) how its business model works or doesn't work-"

    "There have been questions about whether it's doing its business right. Some on Wall Street have always regarded Herbalife as a pyramid scheme, that has not been the case here on Mad Money but some accusations have come back to bite the company in the past"

    "In fact they even got to me frankly back on June 17th when the stock was at $27.75 I even questioned Herbalife's model- I couldn't recommend it - we missed out on a 47% run- you know what happened- I am sure this has happened to you- I am just human- I got beleaguered by the cat calls and the negatives- I couldn't take it anymore- I figured someone knew something I didn't know- ok"

    "Here's the thing, Herbalife under its current CEO has never really had a problem with its business model or sales- but it is easy for unscrupulous Hedge fund managers to spread rumors and to spread gossip that hurt the stock so it's relentlessly pursued and banged down by the shorts to make it so a guy like me just says- look I probably don't know what's really happening here- Maybe I am really missing the story- these guys can't be that wrong right."

    "This is despicable behavior- It's the sort of thing that nearly destroyed our financial system at the beginning of the year- but you don't see the government going after the false rumor mongers. I would like to know what shorts earn their false profits in Herbalife as eventually, though of course as with any good company, the truth does come out - the stock does come back to life."

    Here is another excerpt of Cramer at 2:50 of the above 2009 video-

    "I think Herbalife is the best of the best of the direct sellers for this environment."

    Here are some more excerpts including comments by both Cramer and Johnson from 7:15 of the above 2009 video-

    Cramer: "Lets speak future- Many CEO's have found their company's under attack- many CEO's have found that there are short sellers who really need to have a stock go down."

    Cramer: "What's your advice to them about how to take on people who spread false rumors about a company that is literally just to profit at shareholder's expense by lying?"

    Michael Johnson, CEO: "We're going to beat this out with numbers."

    Michael Johnson, CEO: "We are going to continue to improve our company at all levels-"

    Michael Johnson, CEO: "We are just going to keep posting numbers."

    Michael Johnson, CEO: "We'll let the numbers speak for us."

    Cramer: "One way to stop these people cold is to pay a higher dividend because they got to pay out the dividend."

    Cramer: "Well I would tell people right now listen to me- this guy is money in the bank- I betcha if you own this stock ahead of the December 17th analyst meeting, you're going to feel richly rewarded."

    AND THEN CRAMER ADDS: "and the fact that I left the story cause I was beleaguered, let that be a lesson to you. If you get beleaguered, but the story is good, just stay the course. That's what matters."

    I think that was great advice back in 2009 but it's to bad Cramer has got "beleaguered by the cat calls and the negatives" again. Also, it must be hard for those avid Cramer fans, that purchased Herbalife stock since 2009 based on Cramer's repeated recommendations to buy the stock as the stock climbed up to the $70+ range, to watch as he tells everyone about changing his opinion of Herbalife per this 8/8/12 video "Lightning Round" (see video at 2:50). His change to not recommend Herbalife appears to be based upon a decision made over 4 years ago by Herbalife to not fight a legal battle with Barry Minkow, a convicted felon.

    We can all second guess decisions made by management of a company but it appears at the time of the decision they felt that it was much more important to concentrate on the growth of the company than use their time fighting a small time convict. Anyone that has used our legal system knows that it has a lot of problems and you don't always get the legal outcome you think you will. I personally have fought and wasted a lot of time fighting a legal battle where I knew I was right only to watch a judge totally ignore a signed agreement.

    No one can perfectly predict the outcome of any legal case even when you strongly believe you are right. Here are some excerpts from Wikepedia about Barry Minkow-

    "Many companies have sued Minkow for making false accusations against them. However, most of the suits have gone nowhere since criticizing public companies is usually considered to be protected free speech."

    I think everyone probably will agree including Cramer and CNBC's Herb Greenberg that Minkow is someone with very poor character and wouldn't be a person you would rely upon to make a stock buying decision as documented by these excerpts from Greenberg's article- "Why Did Herbalife Pay Felon Barry Minkow $300,000?"

    "Minkow, who served seven years in prison for being the mastermind behind the ZZZZ BEST fraud, is now serving five years in prison for conspiring to manipulate Lennar, another company he had targeted."

    "Four years ago then-convicted felon Barry Minkow, who had turned from white-collar criminal to claiming to be white-collar fraud-buster, had a new target: Herbalife"

    Per this CNBC 7/31/12 interview with Michael Johnson, Herbalife CEO by Cramer and Greenberg, here's what Johnson was thinking in the decision not to fight Minkow-

    "What's the best for the shareholders?"

    "What's the best for the company?"

    "Let's not distract ourselves with a lawsuit - he's in prison now as we all know-"

    "This isn't worth the time or distraction right now."

    I guess it was easier for Cramer to be critical of Herbalife for a decision they made 4 years ago and to change his position than it was for those longs holding their Herbalife shares, based on his recommendation, to watch Herbalife's share price plunge all the way down to as low as $42.15 in a matter of days. It would seem a decision to pay $300,000 to anyone, much less a convicted felon, would have a lot less significance in the value of a company than the company increasing their revenues from $2.4 BILLION in 2007 to $3.5 BILLION in 2011 while dramatically increasing their profits and EPS per their 2011 Annual Report.

    Before Herbalife's battles with Minkow, Usana Health Services found out the hard way that they wasted their time and even more money by suing Minkow per excerpts from this U-T San Diego article- "Barry Minkow: From scammer, to preacher, to defendant"

    "On Feb. 21, 2007, Minkow sent a report to The Wall Street Journal, the FBI, the SEC and Internal Revenue Service, accusing Usana of having an unsustainable pyramid-like structure and charging that it was at risk of having its profits siphoned to Liechtenstein by an owner who had recently moved there."

    "Usana eventually sued, saying that Minkow's attack was "riddled with exaggerations, half-truths, and plainly false statements." Usana suggested that Minkow's goal was "not only to devastate USANA..., but also to line Mr. Minkow's own pockets.""

    "But because of laws protecting critics of publicly traded companies, there was little Usana could do."

    " U.S. District Court Judge Tena Campbell in Usana's home state of Utah ruled that Minkow's criticism of Usana was protected as free speech. Campbell said Usana could still sue Minkow for stock manipulation but that an out-of-court settlement would save both parties "the cost and inconvenience of protracted litigation.""

    "Usana agreed and settled out of court. Although both Usana and Minkow were barred from discussing the settlement, sources close to the lawsuit say Usana paid Minkow a substantial sum to stop his attacks. Usana's stock rose 7 percent the day the case was settled, showing exactly how much shareholders had feared the Minkow effect."

    Now with the success from making money from an out of court settlement, Minkow continued his efforts to obtain money from large publicly traded companies including Herbalife who found themselves with very few options but to settle, per excerpts from this U-T San Diego article- "Barry Minkow: From scammer, to preacher, to defendant"

    "Over the next several years, Minkow went after a series of other network marketing firms, including Herbalife, which sells diet products, and NuSkin, which makes skin-care goods. In some of these cases, a pattern emerged:

    Step 1: Minkow fires a barrage of accusations against a company.

    Step 2: As share prices decline on the bad news, anyone who is shorting the stock - whether Minkow or his hedge fund friends - makes a quick profit.

    Step 3: The company denies or downplays the charges and either sues or threatens to sue.

    Step 4: As the company confronts the costs of litigation and the uphill challenge of attacking Minkow's free-speech rights, it arranges a private out-of-court settlement. Sources close to the litigation say that in several cases, the settlements ranged from $100,000 to $300,000.

    Step 5: Minkow agrees to stop making accusations and occasionally backtracks on his previous charges.

    As to Cramer's recent changing of his position about Herbalife's stock, after he recommended it in 2009, and then all the way up to its recent $73 high, I have to wonder what is the real reason for the sudden change since he admitted on the above 2009 video- "I couldn't recommend it" while Herbalife was going through its 2008/2009 short attack and now he appears to be siding with the shorts once again. No one would risk accusing Cramer of lacking integrity since as he stated in his 7/31/12 interview of Michael Johnson on CNBC(see above link) how he would have handled Minkow- "Having been involved with lawsuits I would have destroyed him".

    Also, I know its unfair to judge a person or make a decision about them based on any one decision or event because you don't always know the context of that action like this one reported about Cramer at Wikepedia-

    "During that time, he was also an "editor at large" for Smart Money magazine, and was accused of unethically combining his investing and reporting activities when he bought more of stocks that he recommended just before the recommendation article came out, contributing to a $2 million personal gain.[16]"

    I would encourage people to read Jim Cramer's entire Wikepedia at the above link so they can get a real understanding of the depth of his character. I think you will gain a lot of insight into his reporting. Cramer, if you are reading this, you might consider destroying Wikepedia as it seems they have written some pretty nasty things about you.

    Here are some excerpts from that same CNBC 7/31/12 interview with Michael Johnson, Herbalife CEO (see above link) by Cramer and Greenberg along with my comments as to how I would have responded to them-

    Greenberg: "Why do people including the country of Belgium believe you are operating a pyramid scheme?"

    My comment: Belgium? Really? That's the best you have? Herbalife is a 32+ year old company operating in 80 countries and Belgium is your standard?

    Greenberg regarding above question: "Why is this constantly something people bring up regarding Herbalife and the multi level marketing industry?"

    My comment- As if you don't already know the answer to that question- they are short sellers trying to make Herbalife's share price go down. No one has heard anything of significance from either the SEC or the FTC since this short attack began on May 1st of this year so why all the concern right now?

    Greenberg: "What would happen if the FTC came along and raised the same issues as Belgium?"

    My comment: Really- Belgium again? I don't answer "What if" questions. I might wonder what person from the FTC was vacationing in Belgium and didn't have anything to do but find out about their rulings.
    Greenberg referring to Herbalife's products: "We have seen some in garages."
    My comment: Where do you want them to put their temporary inventory, in their bedroom? If someone decides to quit selling Herbalife, Herbalife has a program to buy back products for up to 12 months.
    Greenberg: "Why does it appear most of your distributors fail?"
    My comment: Don't the vast majority of businesses fail in their first two years? At least with Herbalife they probably only lost a small amount of money as compared to most other types of business startups, and they may have found an Herbalife health product which will help them the rest of their life.
    Other CNBC news reporter: "If David Einhorn was sitting here today- what would say to him?"
    My comment: I would prepare myself to hear from him that he doesn't want to make a comment about Herbalife and that sometimes it's much ado about nothing honestly.
    Cramer: "You want to expand in China- How can you assure that you won't have trouble?"
    My comment: Cramer- Now you want us to start trying to help the shorts find areas in the world that we might have trouble in. No thank you. You know I don't answer- "what if" type questions.
    Herb: "You are very big in Mexico- Wal-Mart had problems in Mexico- How do we know you are not paying bribes in Mexico?"
    My comment: Herb, really? Is that all you have left? Do you really want to just start conjecturing about all the possible things that could go wrong? Do you call that unbiased reporting?

    If you will watch the video (see above link) of the interview, especially at the end when he brings up Mexico and Wal-Mart, he seems to have a lot emotion for someone who as a reporter shouldn't have any skin in the game. It would be very interesting to know his various connections to this story.

    How long will this short attack last and when will the stock recover to its prior highs? Well I can't answer that question with any definite time period, and it will obviously depend on how Herbalife continues to do in growing its business as well as EPS but if it's anything like the last time Herbalife was attacked by shorts, it will end with Herbalife's share price rising back up to and beyond where it was when the short attack began.

    Since Cramer was talking about the Herbalife short attack back in 2008 to 2009, I think it's a great place to start to see what happened then-

    Trading date High / Low HLF Share Price
    8/25/2008 High $24.375
    11/24/2008 Low $7.235
    3/09/2009 Low $6.06
    11/01/2009 High $22.025
    4/26/2009 High $24.3775

    Link to Herbalife's stock chart- Adjust to 5 year candle format

    Obviously there were a lot of differences between the short attack against Herbalife back then, including the fact that Herbalife was a fairly new company being traded on the exchanges, than the current short attack. Herbalife's share price declined at a much slower rate since it took almost 3 months to get to its first low share price of $7.235 on 11/24/2008, and then it took a little over 3 more months to get the actual lowest share price on 3/9/2009 of $6.06 . Also, there was a much greater percentage decline in share price than the current short attack. Herbalife shareholders who bought at the very top lost ( 1 - ($6.06/$24.375) over 75% of their share value if they sold at the bottom. The good news for longs who bought in after the first 3 months of the start of that short attack is that they more than tripled (300+%) their shareholder value within less than a year of the lows.

    Since this short attack is quite a lot different, as to the share price plunging so quickly, than the one back in 2008 & 2009, it will probably play out somewhat differently than that one. However since we are already 4 months into this short attack, I would like to believe Herbalife's share price will be back up to where it was and above within 6 to 12 months (a 45+% gain- ($73/$50.26 - 1)) Here are some of my reasons why-

    1) A lot of investors have seen this short attack before including the previous one in 2008/2009 on Herbalife, know the tricks of the shorts, and realize there are substantial gains to be made in the next few months if they buy in now while everyone else is scared.

    2) Herbalife has been traded on the exchange for a much longer time period than when the prior short attack occurred.

    3) Investors have even greater access to more information on the Internet than they did back in 2008/2009 and will do a better job of getting the real truth out about Herbalife being a good company and a great investment opportunity.

    4) Herbalife's share price basically plunged based on David Einhorn's innocuous questions on a May 1, 2012 conference call along with high volume trading as discussed in my prior article- "Herbalife Shorts' Problems Could Be Great Buying Opportunity For Longs" where I posted this challenge to shorts to provide any real facts to support their case against Herbalife-

    Current indisputable facts for case against Herbalife shorts -

    1. All of Einhorn's questions have been answered by Herbalife and the Direct Selling Association. Einhorn has not disclosed either a short or long position in Herbalife. Einhorn has not made one public statement critical of Herbalife or even asked for additional information from Herbalife since his May 1st appearance on Herbalife's investor conference call.
    2. No one has presented any information as to the existence of a real SEC investigation of any type concerning the business activities of Herbalife.
    3. No one has presented any information as to any review or ongoing investigation activities by the FTC currently against Herbalife.
    4. Not one investment reporter has disclosed any new information (all reports have only included previously publicly known information) as to any ongoing problems with Herbalife's business since Einhorn's May 1st appearance.
    5. Before and after May 1st, Herbalife's business has continued to grow at a dramatic rate. No one (Einhorn, investment reporters or shorts) has presented any case as to why Herbalife's business will slow down in the near future.
    6. For the year as of July 31st, Herbalife has repurchased $428 million worth of stock and has announced another $1 BILLION share buyback plan.

    I don't know if Herbalife's share price has hit a bottom yet, but as time passes, with the shorts not being able to push Herbalife's share price down significantly further, and with the increased probability of an even better 3rd quarter financial report looming ahead, I would think we are getting nearer to it, and if I were you, I wouldn't wait to long to buy shares so you will be able to take advantage of what I believe will be significant gains over the next 6 to 12 months.

    Word for the day for Herbalife longs- PATIENCE

    If you think my article has been helpful in exposing some of the problems with shorts as well as other people who seem to be lacking integrity, or if you are long Herbalife and want other people to have a better understanding of Herbalife's situation, please email, post to facebook, twitter, Linkedin, etc. links to this article.

    Disclosure: I am long HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: HLF
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  • G. Hudson
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    Author’s reply » Settlmnt Date Short Interest Closing share price
    8/15/2012 ---- 13,007,577 ----- $53.05
    7/31/2012 ---- 12,422,168 ----- $54.89


    +585,409 Increase in short interest --- ONLY -$1.84 reduction in closing share price


    Shorts only weapon to keep share price down is to increase the number of shares shorted ---> This is going to catch up with them as Herbalife buys back more shares, reports great 3rd quarter earnings, and shorts are forced to cover!!!


    Shorts trying to sell short to prevent share price rise, see my prior Seeking Alpha article- "Herbalife Shorts' Problems Could Be Great Buying Opportunity For Longs"
    27 Aug 2012, 08:17 PM Reply Like
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