Implications Of Herbalife's Soaring Short Interest Ratio

Terry Allen profile picture
Terry Allen

Today, NASDAQ updated its short interest report for Herbalife (NYSE:HLF). Between December 14, 2012 and December 31, 2012, short interest soared over 11 million shares, from 26,221,112 to 37,298,384. Since there are 108 million shares outstanding, the short interest works out to 34.4% of the total number of shares.

At today's stock price ($43.75), those extra 11 million shares works out to a huge bet of about $440 million against HLF. Between those two dates, on December 20th, Bill Ackman opened his attack on the company. There is obviously some questions as to when he sold his shares short, but he has stated that he has sold short a billion dollars worth - Bill Ackman's Hedge Fund Looks To Be Off To A Tough 2013.

Check out the short interest numbers:

Short interest in HLF more than doubled in May 2012 when Greenlight Capital's David Einhorn mentioned concerns about Herbalife's multi-level-marketing programs in a conference call. This rather innocuous negative statement caused short interest to rise from just over 6 million to nearly 12 million shares, and the stock price collapsed from about $70 to $45, knocking about $1.6 billion off the value of the company.

On the day after the conference call, at the very public Ira Sohn Investment Conference Einhorn did not even mention the company, but the damage had apparently been done (although the stock rallied 16.7% on that day. The chart shows that the stock has traded consistently lower since the conference call:

Let's fast-forward to what happened when Bill Ackman started his selling and negative publicity campaign in December. The stock initially fell about 50% but then reversed itself and has recovered most of its lost ground. Bottom line, Einhorn's conference call knocked a third off the company's value (while short interest rose about 6 million) and Ackman's efforts (short interest rose

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Terry Allen profile picture
Publisher of options newsletter since 2001.. Thirty years experience trading options virtually every day. including stint as seat holder and market maker on the C.B.O.E. MBA from Harvard Business School and DBA from Univ. of Virginia Darden School. Author of Making 36%: Duffer's Guide to Breaking Par in the Market Every Year, In Good Years and Bad (4th revision - 2012) and Coffee Can Investing: A Better Idea Than Mutual Funds in an IRA or 401(K), 2014. is a newsletter that carries out eight different option portfolios which many subscribers mirror on their own or through auto-trade at several brokers who make all the same trades in individual customer accounts. Each portfolio offers something different (bullish, neutral, or bearish),and different underlyings (GOOG, SPY, SVXY, and other individual companies). In 2005, the S.E.C. brought an action against Dr. Terry Allen, claiming that he was managing money for people without being a registered investment advisor because of the auto-trade service offered by several brokers who placed trades in their customer accounts based on Terry’s Tips newsletter recommendations. A second complaint was for a single statement on his website that they believed was incorrect and therefore fraudulent. Although two large law firms assured Dr. Allen that if he went to court on the first issue, he would win because there was a Supreme Court decision stating that investment newsletters are exempt from registration requirements - it would be a violation of their First Amendment rights. However, they estimated that his legal expenses would be greater than settling with the S.E.C. (and a year or two of his time tied up in court proceedings), and both firms recommended that he accept the settlement offer while not admitting any guilt. The second issue (fraud) involved a single statement that was true when it was written but a couple of years later, option prices fell to 10-year lows, and it was no longer true. The S.E.C. argued that the statement was not removed from the website in a timely enough fashion. For the past eight years since the settlement with the S.E.C., Dr. Allen has have been publishing the Terry’s Tips newsletter (and recommendations are executed in customer accounts at thinkorswim by TD Ameritrade through their Auto-Trade program), and the S.E.C. has not objected to any of his activities.

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