Does Ackman Have An Herbalife Ace Up His Sleeve?

| About: Herbalife Ltd. (HLF)

Herbalife (NYSE:HLF) used to just be another stock on the ole' big board. Today, in 2013, Herbalife has turned into a battleground for two investors that simply just don't like each other. Rarely has a Wall Street feud come up that deserves its own reality show more than the Ackman/Icahn brawl of 2013 started over Herbalife.

And, make no mistake about it, I've backed my horse; Bill Ackman, who has claimed through this 300 slide presentation and speech that Herbalife is one of the most elaborate and blatant pyramid schemes the world has ever seen. It's a great watch if you have the three and half hours to spare. I've watched it probably ten times over at this point, with it making more and more sense each time that I see it. Ackman remains resolute in his thesis of the company, and I remain in his camp.

Icahn, especially with the recent shenanigans he's tried to pull with Apple (more on that here), is reminding me more and more of an old timer that had great success back in the day; but is now fooled into thinking he can't lose, and is slowly losing his edge. Ackman, on the other hand, seems to be as sharp as ever - cutting losses with J.C. Penney (NYSE:JCP), and confidently staying behind his Herbalife thesis.

Admittedly, Herbalife stock has had a great year in the face of me initially calling it a short at the beginning of 2013. So, regardless of the long-term, I was obviously on the wrong side of the short term trade, and I admit that. At the high $60's, I've shorted Herbalife once again.

(Click to enlarge)

Herbalife reported earnings on Monday the 28th, and they beat analyst expectations. Revenue fell in line in what the company called a "record" third quarter for the company in its press release.

Rather that run hard after an impressive earnings, Herbalife has pared some of its gains by the end of the week this week - perhaps on muddled guidance, perhaps for other reasons.

My latest article, "The Cult of Herbalife's Secrets Behind Its Earnings", goes into some details as to why the earnings may not have hit the "home run" that longs were looking for; as well as exploring some questionable nomenclature changes and overall business practice concerns.

Earlier in October, Ackman restructured his short against Herbalife, and noted that he is still behind his thesis:

The theme in his last letter to investors in August was "mistakes" made by Pershing Square; this time it is "conviction."

"Bottom line, we continue to have enormous conviction in our investment thesis," he told his investors in the latest letter. He still contends that Herbalife is a pyramid scheme, an assertion Herbalife denies.

It was the first that the news has heard from Ackman on it since he had been toasted for nearly $400 million on Herbalife's run up through 2013.

I had argued that Ackman was likely to have another "ace up his sleeve"; potentially something crushing that he'd unveil in the coming months. I said this, in my last article:

If there's one thing I'm sure of, it's that when funds take monster positions in companies, they're almost always in possession of more information than they're disclosing. I still think Ackman has an ace up his sleeve here somewhere - not that he needs it.

On Thursday, reported:

Activist investor Bill Ackman is preparing another major presentation on Herbalife, a source told CNBC on Thursday.

The presentation, set to be made at the Robin Hood Investment Conference in November, will include new information that his firm, Pershing Square, has uncovered after speaking with several former employees of the company, according to the source.

It sent Herbalife stock down for the day as both bears and bulls are waiting to hear what Ackman is going to disclose.

There is zero doubt: Bill Ackman and his team have a seemingly unprecedented grasp on the Herbalife business model, which is almost impossible to decipher. I would bet heavily that Bill Ackman, who is famous for doing insane due diligence (he read through 140,000 pages while doing his MBIA research), knows more about the company and its operations than probably 95% of its own distributors and definitely a large portion of its stockholders.

There are a lot of longs that will defend Herbalife to the death, but not that many that can articulate exactly how the extremely twisted pretzel that is Herbalife's business plan works.

The longs continue to feel safe under the Icahn blanket, as I said in my previous article:

But, longs continue to follow the "leads" of billionaires Carl Icahn and George Soros, who have both invested in the company. What Herbalife longs ignore is the fact that both of these investors:

  • have a personal beef with Bill Ackman, and are trying to sink him - likely just for sport at this point.

  • have made so much money in the past that they're starting to really lose their minds and think they're invincible when they're not [see Carl Icahn's suggestion of a $150 billion Apple (NASDAQ:AAPL) buyback]

With a coming presentation and updated news coming from Ackman this month, it's a great time for me to add to my short position, which I intend on doing, as again, I firmly believe that Bill Ackman will be the victor in the battle over Herbalife.

Disclosure: I am short HLF. 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.

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