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50 years as an economics nerd. Reformed ( former ) stock broker and financial planner with 40+ years experience as a trader and investor.
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  • Herbalife Shorts Are Missing The Point

    All the talk by Herbalife (NYSE:HLF) shorts revolves around the marketing plan and whether or not it is a pyramid scheme. This completely misses the number one point of basic fundamental analysis. You always need to look a company's products and services to see if they provide real value to consumers and compare that with the value provided by competitors.

    This is where Herbalife comes up way short. The products are significantly over priced when compared to other products in the marketplace. This is the point that short sellers should be hammering home. This why people should be shorting this stock.

    Forget all the hype about pyramid schemes, government investigations, and court decisions. Forget the hedge fund ego battles between Mr. Ackman and Mr. Icahn. If short sellers real want to drive the company's stock price down, they should focus on educating consumers to alternatives to Herbalife's over-priced products.

    One product example

    Herbalife sells a soy protein supplement product at a retail price of just over $40. That means a distributor/member can use their 25% discount to purchase this product for just over $30. An equal quality product from a highly reputable manufacturer can be purchased at an everyday, non-discounted, full retail price of $9.95. The distributor/member is paying more at the discounted price than even a Whole Foods shopper would pay at full retail.

    A top level supervisor gets the 50% discount paying just over $20 or twice the retail price of the competing product. They now have to attempt to retail the product hoping that their customers don't shop around. Even if their customers just looked at Amazon, they would find most Herbalife products available for a 20% or better discount from the retail price.

    Without MLM peer-pressure marketing, this product would never sell.

    Counterpoint

    Herbalife fans will say that only one product is being mentioned here and then try to defend the rest of the product line. Based on my 25+ years experience in the supplement industry, it will be easy for short sellers to find plenty of higher value alternatives.

    Revelation

    The Amazon selling price is a revelation on its own. Combine the discount and Amazon's 15% cut with miscellaneous sales expenses and there is almost no profit left for the supervisor. Supervisors are obviously willing to do anything to keep their volume up. Supervisors wouldn't have to resort to discounting if a solid market existed for Herbalife's products. They probably expect to make their profit from peer-pressure clients, hyped-up distributor recruits, or uneducated consumers.

    How to educate the public

    All the short sellers need is a simple website with a page for every Herbalife product. On each page provide comparisons between the Herbalife product and at least two or three alternative products that are available at a better price and often will be of higher quality. The more alternative products, the better the low value message will be.

    There is power in numbers. Harness all the public relations and social media power of the short sellers to let everybody know about the site. The big shorts like Mr. Ackman could afford to put an intern or two on the project full-time. There would be no legal problems as long as the information provided is true.

    Change the conversation to being about how crazy a consumer would have to be to purchase phenomenally over-priced products from Herbalife. Make it so nobody can hear the word Herbalife without thinking over-priced products.

    Once the low value concept is established, it is easy to attack the marketing plan as a bad way to make money without needing to harp on the pyramid scheme angle. The shorts just need to state how obvious it is that nobody would buy Herbalife's products without the pyramid scam peer-pressure marketing. Show potential recruits how stupid a business opportunity is being offered and how nobody reputable would sell these products.

    So, the path for short sellers is simple.

    Tie the name Herbalife to over-priced low-value products and the stock is sunk.

    Note: Once again the editors didn't like my post. So I will be posting a longer version of the post to my new personal blog over the weekend. The post will contain my response to the editors.

    Dec 06 1:19 PM | Link | 11 Comments
  • Why The New IPhone Does Not Matter

    The media is abuzz about the announcement of a new iPhone on Sept. 10. The press's favorite game seems to be guessing what features the new iPhone will have and what colors it might come in. What you need to understand is why none of this matters to your decision to invest in Apple (NASDAQ:AAPL).

    Just an upgrade

    The original iPhone was a category killer that provided its users with benefits they had never before received from their mobile phones. The new iPhone is basically going to have the same benefits as the original just with some new features. The iPhone 5 will just be another upgrade.

    You need to realize that no matter what features the new version has it will still not be enough for the press. Every news story about the introduction of the new phone will prominently feature quotes from experts telling you what is wrong with the new version.

    The color does not matter because most iPhone owners buy covers for their phones. The screen size does not matter because it will be a size that is good enough for most buyers.

    None of what will be said matters to you, the investor, who is intelligently grounded in the fundamentals.

    What does matter

    The number one thing that matters is the answer to this question. Will there be profitable sales?

    Here are the questions you need to be asking yourself along with my answers:

    1. Will millions of Apple fanatics decide to replace their iPhone 5 with the new version? Yes.
    2. Will millions of Apple customers with older models that are out of contract decide to replace their old phones with the new phones? Yes.
    3. Will millions of people in China or the developing countries buy some version of an iPhone? Yes.
    4. Will Apple continue to maintain its industry leading profit margins rather than focus on market share? Yes.

    If you, too, can answer "yes" to these questions, then the next step is to answer the following list of questions:

    1. Will revenue and profits continue to increase? Yes.
    2. Will Apple continue to upgrade and profitably sell its existing product line? Yes.
    3. Will Apple continue to buy back its stock? Yes.
    4. Will Apple continue to make enough profit to pay its dividend? Yes.
    5. Will the dividend increase? Yes.

    You do not even need to get bogged down by crunching all the numbers. Carl Ichan and George Soros have already done that for you. Do you think they would be investing in Apple if there wasn't profit potential beyond what they have already made just by saying they have been buying the stock or setting up a dinner with Tim Cook?

    Those nagging buts

    1. But Apple's market share is dropping.
    2. But gross margins are dropping.
    3. But there is strong competition.
    4. But it does matter because the iPhone is such a big piece of revenue.

    You should expect market share that started at 100% to drop as new competitors enter the market. The important figure is the number of units in customers' hands which is still increasing. This is business, not some sporting event. The company does not need to win the market share battle to be hugely profitable.

    Of course, gross margins have dipped a little bit. Reduced margins are a natural occurrence in a market with more competitors. However, Apple is still managing more than double the margin that Samsung makes from smartphone sales.

    Strong competition is good for Apple. The company will fight harder and create better products for its customers. One of Apples biggest strengths is playing to its core customer base. It does not try to be all things to all people.

    There are enough smart people working at Apple to make sure that they do not blow the new iPhone launch. There will be significant revenue no matter what bells and whistles the new version will offer.

    Low expectations

    Yes, we are looking at this from a viewpoint of low expectations because that is the best way for a fundamental investor to evaluate the stock. If you think that Apple remains a growth and income powerhouse at low expectations, then anything over that is extra profit. Apple looks to be in a very solid position for at least another 2 to 3 years. I believe that if you buy this stock, you will not be disappointed.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: AAPL, long-ideas
    Sep 06 1:41 PM | Link | Comment!
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