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2014 Short Idea: Bill Ackman's High-Profile Trade, One Year Later (Play Money Only!)

|Includes:Herbalife Ltd. (HLF)

Before you call me crazy (some TSLA longs already assume I am crazy, so I don't take offense), please read my earlier Instablog entry where I discussed two long investments over several years in the sensor space.

That long idea (SWIR, INVN) is likely more sensible as a small addition for (tech-sector) retail portfolios. Small is even important for this idea:

When shorting (in general, not just the following stock), make sure you only trade small positions or use (put) options so you limit your risks - directly short-selling a stock in theory bears unlimited risks*.

With that said, my 2014 short-trade is HLF in case it trades up to near $100 or even crosses that psychological price barrier.

Yes, HLF. It's currently trading near $80 after a string of good news for the company: Legal news from Belgium, a successful re-audit from newly appointed PWC and many hedge fund managers (some of them having a personal feud history with Ackman) piling on the long side.

In addition, there are two specific risks for shorting HLF in the future:

1. A stock buy-back in 2014 (with likely more upside for the stock price), this is now much easier to accomplish following a re-audit with "no material changes" according to the company.

2. A complete going private (HLF already did this in the past before listing once again the NYSE)

Especially in scenario two, retail investors would lose money at once since they can't easily construct over-the-counter instruments (e.g. a default premium on the company debt or similar) once HLF is private.

My contrarian idea (again, only with a small position and play money) nevertheless is:

Short HLF in the $75-100 area and again with a second chunk if HLF crosses $100 substantially - and you still believe the pyramid scheme scenario is intact (i.e. HLF doesn't change its business/payment model).

Why? I think Ackman's pyramid scheme thesis remains valid long-term and the stock already prices in most good news at $85 to $125**.

To sum up my short idea with a recent tweet from Herb Greenberg (one of the few CNBC people I like to listen to):

Reminder! The $HLF auditors are NOT auditing whether the business model is suspect, just whether the #s are in accordance w/GAAP.

I like contrarian plays from time to time. Shorting HLF one year after Ackman's presentation may be such a trade since it's at all-time highs.

PS: Again, use play money only on this trade! Or options to limit risks.


* "Unlimited upside" is of course quite unrealistic - but there have been cases, most notably the botched merger/take-over between Volkswagen and Porsche a few years ago where a short squeeze led to spikes in stock prices of publicly traded companies with huge market caps.

** Ackman's long PDF presentations (the first in late 2012, the second in late 2013 which basically re-iterated the first with more details and real-life examples) can be found at a special HLF website he has set up:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I may go short HLF using options or other instruments over the coming weeks and months should the stock stay above $75 or rise further.

Stocks: HLF