Herbalife, The MLM Model And Generational Bias

| About: Herbalife Ltd. (HLF)
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The epic bull/bear fight over Herbalife (NYSE:HLF) between Carl Icahn (age 77) and Bill Ackman (age 46) has become a Wall Street spectacle of financial titans clashing over the perceived futures of a multi-level-marketing company. Both men are obviously well informed on it. Each one appears to firmly believe in his own thesis on the company.

Bill Ackman is short and has stated that he believes the company is a "pyramid scheme" and expects the stock to go to zero. Carl Icahn has since taken an aggressive long position in that is equivalent to about 13% of the company. On January 25 2013, the two veteran investors clashed on live TV in an ego charged whirlwind of school yard style name calling.

The stock has experienced significant volatility over the last few weeks as the battle has raged. After the bell on Tuesday Q4 earnings showed a beat over expectations, but this did little to move the stock. The big mover is quite clearly the opinions and positions of Icahn and Ackman.

The battle between Icahn and Ackman over centers on the legitimacy of the multi-level-marketing business model that is Herbalife. It appears that the difference in conceptual framework between the two players may stem from a case of generational bias in reference to multi-level-marketing business models.

The modern version of multi-level-marketing came on the scene in 1945, it was called the California Vitamin Company (later named Nutrilite). In 1959 an MLM that most of us are familiar with was founded -- American Way Association or Amway. Amway was built by distributing the first multivitamin products made in the U.S., by Nutrilite.

As most of us know Amway boomed and became a multi-billion dollar company. The MLM model was wildly successful and has since been copied by countless groups, organizations and companies. Some of these outfits have been have been nothing but scams -- a quick Google search will yield hundreds of MLM horror stories.

In 1979 the Federal Trade Commission investigated Amway as to whether the company was a pyramid scheme. The FTC ruled that Amway was not a pyramid scheme. However, the FTC found that Amway was "guilty of price-fixing and making exaggerated income claims".

While there is no doubt of the acuity of either Icahn or Ackman, it is possible that their perceptions of the MLM business model are very different. It would appear that Bill Ackman's view of the MLM model is much darker, in general, than Carl Icahn's.

From my point of view (which may be tainted by my generational bias), the general popularity of the MLM model is waning. A very damaging factor to the MLM model is the ability of any person to order almost anything on the Internet. You no longer need to contact your MLM-connected neighbor to get a good deal. For these reasons, I would side with Ackman in saying that the MLM model is not strong in the long-run. That is not to say that stock may not go higher.

Given the personal animosities between Icahn and Ackman it is quite likely that Icahn's long position will outlast Ackman's shorts, especially if there is upward price momentum in the stock. Should Ackman be forced to cover his shorts at a loss, I would expect Icahn to take profits on his position a relatively short time later. This is the point where I would look to take a short position in it.

All said, this stock is unlikely to trade with much reference to its fundamentals (and much more on egos) as long as this battle rages. Far-from-equilibrium, situations like this can present opportunites for large gains in a short time if played correctly.

Chart forHerbalife Ltd.

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.